Economy

What is the news?

The Government of India has released a new ‘Public Sector Enterprise Policy’.

About ‘Public Sector Enterprise Policy’:

The policy classifies public sector commercial enterprises into the strategic and non-strategic sector:

Strategic Sector: There would be a maximum of four public sector companies in strategic sectors. State-owned firms in other segments would be privatized eventually.

The following 4 sectors are covered under strategic sectors:

1. Atomic energy, Space and Defence
2. Transport and Telecommunications
3. Power, Petroleum, Coal, and other minerals
4. Banking, Insurance, and financial services

Non- Strategic Sector: CPSEs of this sector shall be privatized or closed, if privatization is not possible.

Exceptions: The policy would not be applied on:

• Public sector classes like major port trusts, the Airport Authority of India, and undertakings in security printing and minting.
• Public sector entities such as not-for-profit companies or CPSEs providing support to vulnerable groups.

Process of Privatisation:

• NITI Aayog will recommend PSUs for retention in strategic sectors and that should be considered for privatization, merger, or closure.
• The Core Group of Secretaries on Divestment(CGD) headed by the cabinet secretary will consider these recommendations.
• Final approval will be provided by the Alternative Mechanism. This mechanism consists of the Finance minister, Ministers for Administrative reforms, and the Minister for roads, transport, and highways.
• Further, the Department of Investment and Public Asset Management (DIPAM),  can also approach the Cabinet for strategic disinvestment of a specific PSE from time-to-time. DIPAM manages government equity in public sector companies.

Source: The Hindu

Strategic Disinvestment Policy: Issues and Challenges – Explained 

Synopsis: By taxing the income of PF contributions over 2.5 lakhs, the government wants to restrict High net-worth individuals (HNIs) who are using the social welfare scheme as a tax haven. Though it is well-intended, it has many ambiguities.

Read More – Budget proposes tax on EPF interest|ForumIAS Blog

Background

• The Union Budget 2021 has proposed taxing the income on provident fund contributions of over Rs. 2.5 lakh a year from 01 April 2021.
• The rationale given for taxing the income from provident fund contributions is to target HNIs. They are using the PF savings to avoid taxation. For example, the 100 largest employees’ PF (EPF) accounts had a combined balance of over ₹2,000 crores.
• This is not the first time the government had tried to tax PF savings. In the 2016-17 Budget, the government proposed to tax 60% of EPF balances at the time of withdrawal. But due to protest from employees, it was withdrawn later.

What are the ambiguities in this scheme?

Revenue Department has pointed out that the tax will only affect a small group of HNIs. However, the scheme suffers from the following ambiguities,

• First, the threshold of taxing contributions of over Rs. 2.5 lakh is very low. It will end up taxing PF income for employees who are investing ₹21,000 a month towards their retirement.
• Second, the threshold proposed is also not in line with the ₹7.5 lakh limit. It was set in last year’s Budget for employers’ contributions into the EPF, National Pension System (NPS) or other superannuation funds.
• Third, it creates inequity between India’s limited retirement savings instruments. For example, it does not cover NPS investments over ₹2.5 lakh a year, but it includes government employees’ contributions into the GPF.
• Fourth, it is also not clear on when and how the tax is to be paid. Either at retirement or each year after the PF rate is announced.
• Fifth, The CBDT chief has said that employees should showcase PF income in their annual tax returns. But this may work for GPF members whose interest rate is announced every quarter. Not for EPF accounts, as interest rates are declared late and credited even later.
• Finally, this move will affect the fund flow into EPF. This will in turn hamper the government’s sources for finance which is largely dependent on market borrowings.

Source: The Indian Express

Syllabus: GS -3 Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Synopsis: The government has decided to privatise two public sector banks. The move will give the private sector a key role in the banking sector.

Introduction 

The government has announced the disinvestment policies for four strategic sectors including banking, insurance, and financial services. The government will have a bare minimum presence in these sectors.

• Earlier, the government merged ten PSU banks into four.
• The government is now left with 12 state-owned banks, from 28 earlier.
• The government will select 2 banks for privatization, based on the NITI Aayog’s recommendations. These recommendations will be considered by a core group of secretaries on disinvestment. 

What were the reasons for the nationalization of Private banks?

In the Mid-1960s, the commercial banking sector was most profitable, especially after the consolidation of 566 banks in 1951 to 91 in 1967. However, some issues were present in this sectors at that time:

• Branches were mostly opened in the urban areas. Rural and semi-urban areas were not served by commercial banking.
• Banks were not willing to take any social responsibilities. They were more concerned with the profits and afraid to diversify their loan portfolios.
• Nationalisation was done with an intention to align the banking sector with a socialistic approach of the government.

Thus, from 1969, the process of nationalization of the 14 largest private banks started.

Why government is privatizing the PSBs?

However, at present, PSBs are suffering from many issues:

• First, Public Sector Banks continue to have high Non-Performing Assets and stressed assets as compared to private banks.
• Second, banks are expected to report higher NPAs and loan losses after the Covid-related regulatory relaxations are lifted. As a result, the government would need to inject funds into weak public sector banks. 
• Third, Governance reforms have not been able to improve the financial position of public sector banks. 

The profitability, market capitalization, and dividend payment record of PSBs are not improving, despite efforts of reform by the government.

How are the private banks performing currently?

• Private banks’ market share in loans has risen to 36% in 2020, while public sector banks’ share has fallen to 59.8% in 2020 (from 74.28% in 2015). 
• They are expanding their market share through new products, technology, and better services. They have attracted better valuations in stock markets. 
  • For example, HDFC Bank has a market capitalization of Rs 8.80 lakh crore while SBI commands just Rs 3.50 lakh crore.
• However, everything is not well within private sector banking as well. CEOs of ICICI and Yes bank are facing the investigation for doubtful loans and other illegal activities. Lakshmi Vilas Bank merged with DBS Bank of Singapore after operational issues.
• Moreover, an Asset quality review of banks in 2015, found that many private sector banks were under-reporting NPAs.

Thus, the privatization drive this time should be thoughtful. Lessons should be learnt from the past. An adequate mechanism to ensure accountability must be established in the commercial banking sector.

Recently the U.S. determined India’s Digital Services Tax (DST) as discriminatory. It concluded that the DST is causing an adverse impact on American commerce and hence, an action needs to be taken under trade act. Meanwhile, The USTR also said, “DST by its structure and operation discriminates against U.S. digital companies”. But the USTR in its special 301 report missed few important aspects and also completely neglected the global need to tax digital services.

What is Digital Services Tax (DST)?

In 2016 India introduced a 6% equalisation levy. But the levy was restricted to online advertisement services (commonly known as “digital advertising taxes” or DATs). In simple terms, the levy applied on the payments made to a non-resident by the Indians for advertising on their platform.

The government in 2020 introduced an amendment to the equalisation levy in the Finance Bill 2020-21. The important amendments include,

• • A 2% Digital Service Tax (DST) was imposed on non-resident, digital service providers. With this amendment, the foreign digital service providers have to pay their fair share of tax on revenues generated in the Indian digital market.
  • The amendment widens the tax to include a range of digital services. These services include digital platform services,  software as a service, data-related services, and several other categories including e-commerce operations.
  • Companies with a turnover of more than Rs. 2 crores, will pay this tax. 

Why India introduced the Digital Service Tax?

First, the nature of digital service companies. These companies don’t have any physical presence in the markets. Instead, they use intangibles to provide services. For example, one can pay for the Amazon Prime membership in India. But the services of prime membership like watching movies, listening to songs are intangible.

Determining the value of these intangibles is tough. So the government introduced the Digital Service Tax of 2% on non-resident service provider’s revenue in India.

Second, the failure of international consensus.  In 2013, the OECD (Organisation for Economic Co-operation and Development) launched the Base Erosion and Profit Shifting (BEPS) programme. It was launched primarily to find a way to tax digital companies. But no consensus has been achieved yet.  So, in 2016 India became the first country to implement the equalisation levy as a temporary way of taxation. This is then followed by countries like France, UK, etc.

Third, India’s right to tax digital service providers. If a company has users in India and also has an economic connection with India then, India has the right to tax its economic operation. India being a developing country provides large markets for digital corporations. So taxing them is a matter of right.

Fourth, These DST create a level playing field between online and regular (brick and mortar businesses). In 2016, the Akhilesh Ranjan Committee Report had also suggested to tax the digital companies as they enjoy a sustainable economic presence.

What are the accusations mentioned by the US? What India said in reply?

The first accusation, DST is inconsistent with the principles of international taxation. International taxation laws apply to the revenue of companies (not on income), extraterritorial application of DST (Digital service companies present outside India), etc.

• • Indian reply: Several global tax measures like royalty, technical fees are not levied on revenue. Similarly, all US states have laws on remote sellers, and they tax non-US resident entities.

The second accusation, DST does not extend to identical services provided by non-digital service providers. This is a violation of trade practices.

• • Indian reply: When the company is non-digital (i.e., brick and mortar) then that company is subject to Indian income tax. Further, this DST has been introduced to provide a level-playing field.

The third accusation, DST is discriminatory because it targets US companies.

• • Indian reply: The DST is applicable to all digital service providers having an annual turnover of more than ₹2 crores in India-based digital services. As per USTR’s own analysis, only 119 companies in the world would likely be subject to the DST, of which 86 are U.S. companies. So the criteria do not target anyone. It is the result of the asymmetric digital power of US companies.

Concerns associated with DST:

First, the DST as a tax policy targets a single sector (digital services). Economic experts argue that framing a tax policy to target a particular sector is unfair and have disastrous consequences for the growth of that sector.

Second, digital service providers might pass on the tax to consumers. Ultimately, burdening consumers. Just like service tax passed on to consumers, DST can also pass on to consumers if the service provider wishes.

Third, not feasible to separate the digital economy and the global economy. The growing digitization has blurred the line between them. This is one of the prime reasons due to which OECD is unable to arrive at a consensus.

Fourth, the DST might attract Retaliatory Tariffs. The USTR investigations pose a threat of retaliatory tariffs and might trigger the trade war between India and the US. Even the slightest retaliatory tariff will affect the Indian ICT industry’s growth.

Suggestions:

First, India can follow the U.K. model of DST. The major advantages of the U.K. model are,

• The U.K. allows companies to not pay any tax if their net operating margin is negative. By including this, India can avoid criticisms like India’s equalization levy is on revenue and shift towards the profit of the company.
• India can consider taxing only 50% of the revenues from the transactions involving three jurisdictions. For example, an Australian user located in India receiving services from a U.S. company. This will make Indian DST more inclusive and also garners international support.

Second, India has to remain committed to the OECD process. Apart from that, India can mention the ways to tweak DST design or try to achieve consensus. This will make India move ahead and phase out DST and roll out the new agreed tax policy of OECD.

Third, the U.S. government has to realize the challenges in taxing digital service providers and also have to participate in these global talks. This will not be only beneficial for other countries but also a way to make these digital giants accountable.

More than 24 countries have either adopted or are considering adopting, a DST or a DAT after the concept got introduced in India. So the tax challenges posed by the digital economy is not a problem between India and the US. It is a global problem and the US has to accept this and act accordingly.

COVID-19 pandemic has hit the Indian economy very hard. At once, due to lockdowns, Indian economy was dried out of funds. Economic activities got reduced drastically. At present, the Indian economy is in urgent need of a revenue stream so that all activities can go back to normal.

Government expenditure was expected to help the economy out, just like it did during the 2008 financial crisis. However, all these factors have also reduced the revenue and capital receipts of the government.

Now, the government has announced a large-scale monetization of government sector assets. It includes the sale of vast tracts of land and disinvestment receipts of ₹1.75-lakh crore.

Government Policy for strategic disinvestment 

During Union Budget 2020-21 presentation, Government announced a new policy for strategic disinvestment of public sector enterprises. It will provide a clear roadmap for disinvestment in all non-strategic and strategic sectors. The government has aimed to receive Rs. 1,75,000 crore from disinvestment in BE 2020-21.

1. The policy will cover existing Central Public Sector Enterprises (CPSEs), Public Sector Banks, and Public Sector Insurance Companies.
2. The government has classified the public sector under 2 categories: 1. Strategic Sector and 2. Non- strategic sector.
3. In Non-strategic sectors, the government will exit from all businesses. It will keep only a ‘bare minimum’ presence in four broad strategic sectors, i.e.
   1. Atomic energy, Space and Defence
   2. Transport and Telecommunications
   3. Power, Petroleum, Coal, and other minerals
   4. Banking, Insurance, and financial services
4. The government will incentivize States for disinvestment of their Public Sector Companies. An incentive package of Central Funds for states will encourage them to do so.

The new disinvestment policy goes further than the past case-by-case approach and straight away allows the sale or closure of nearly 151 PSUs (83 holding companies and 68 subsidiaries) in non-strategic sectors.

Other than that, Government will monetize the surplus land with Government Ministries/Departments and Public Sector Enterprises. A Special Purpose Vehicle will be created in the form of a company to carry out monetization. 

What is Disinvestment?

• Disinvestment means the sale or liquidation of assets by the government. It usually consists of Central and state public sector enterprises, projects, or other fixed assets.
• The government undertakes disinvestment to reduce the fiscal burden on the exchequer. It raises money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources.
• Strategic disinvestment is the transfer of the ownership and control of a public sector entity to some other entity (mostly to a private sector entity).
• The disinvestment commission defines strategic sale as the sale of a substantial portion i.e. 50%, or higher percentage of the Government shareholding in a central public sector enterprise (CPSE). It also involves a transfer of management control.
• National Investment Fund (NIF) was constituted in November 2005. In this fund, the proceeds from the disinvestment of Central Public Sector Enterprises were to be channelized.

Need of disinvestment

1. Under the aegis of the Atmanirbhar Bharat Mission, the rationalization of the participation of the CPSEs in commercial activities has been proposed.
2. As per the experts, the involvement of the government should only be limited to ‘strategic sectors’. So that it can develop these crucial sectors of the economy with its full energy.
3. This will encourage healthy competition in the non-strategic corporate sector. It will lead to an increase in their efficiency under the pressure of competition.
4. Selling the non-productive companies will provide the government with non-debt revenue in this time of fund crunch. Moreover, it will increase the efficiency of the government investments in the Public sector.

Performance of disinvestment in the recent scenario:

• According to the Department of Investment and Public Asset Management (DIPAM), between 2004-05 to 2013-14, disinvestment raised Rs. 1.07 lakh crore, on an average yearly collection of Rs. 10,700 crores.
• However, from 2014-15 to 2017-18, the collection went up to Rs. 2.12 lakh crore, i.e., a yearly collection of Rs. 53,000 crores.
• The government has exceeded the target of Rs. 1 lakh crore in 2017-18 and Rs. 80,000 crores in 2018-19.
• The success of BHARAT-22 Exchange Traded Funds (ETF) takes government closer to the disinvestment target. The ETF is a benchmark to an index named BHARAT22 consisting of 22 companies (19 PSEs and 3 private).
• However, in 2020-21 due to the COVID-19 pandemic, the disinvestment process was hindered in between. It could only gather disinvestment revenues of Rs 31,000 crore against a target of Rs 2.1 lakh crore.

Challenges of disinvestment policy:

First, the Sale of profit-making and dividend-paying PSUs would result in the loss of regular income to the Government. It has become just a resource raising exercise by the government. There is no emphasize on reforming PSUs.

Second, the valuation of shares has been affected by the government’s decision not to reduce government holdings below 51 percent. With the continuing majority ownership of the government, the public enterprises would continue to operate with the earlier culture of inefficiency.

Third, Government is not willing to give up its control even after strategic disinvestment. It is evident from the budget speech of 2019-20 by the Finance Minister. She stated that government is willing to change the extant policy of government. It will change the policy of “directly” holding 51 percent or above in a CPSU to one whereby it’s total holding, “direct” plus “indirect”, is maintained at 51 percent. It means government will still exercise its control over PSUs.

Fourth, The process of disinvestment is suffering from bureaucratic control. Almost all processes starting from conception to the selection of bidders are suffering due to it. Moreover, bureaucrats are reluctant to take timely decisions in the fear of prosecution after retirement.

Fifth, Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security. Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with our strategic goals. For example, disinvesting Bharat Petroleum Corporation Limited (BPCL).

Sixth, Loss-making units don’t attract investment so easily. It depends upon the perception of investors about the PSU being offered. This perception becomes more important in the case of strategic sales, where the amount of investment is very high.

Seventh, Complete Privatization may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits

Eighth, using funds from disinvestment to bridge the fiscal deficit is an unhealthy and short-term practice. It is said that it is the equivalent of selling ‘family silver’ to meet short term monetary requirements.

Way forward

Disinvestment and rationalization of some CPSEs are being planned. But there is also a need to strengthen the sectors retained by the government to fully meet the expectations.

For strengthening them, the government should take steps to completely revamp the Boards of the CPSEs and reorganize their structure.

The government should increase the operational autonomy in CPSEs. It can be supplemented by strong governance measures like listing on stock exchanges. It will increase the transparency in their performance.

The government must also try to provide the bidders with a fair valuation of the PSUs. It will boost their confidence in the disinvestment process.

The government should also avoid its involvement by any means in the management of operations of PSUs, after its strategic sale. Otherwise in the long run, it would discourage the buyers from investing in them.

Some steps taken by the Department of Public Enterprises will improve the performance of CPSEs. These are:

1. The performance monitoring system of the CPSEs has been reformed.
2. It has also improved the process of timely closure of sick and loss-making CPSEs and disposal of their assets.

What is the News?

The government has proposed to make the interest earned on EPF contributions beyond ₹2.5 lakh Taxable.

Why has this proposal been made?

• The government has found instances where High Net Worth Individuals(HNIs) are contributing huge amounts to EPF. They are getting the benefit of tax exemption at all stages — contribution, interest accumulation, and withdrawal.
  • Example: In 2018-19, ₹62,500 crores were deposited into EPF accounts by HNIs. The largest EPF account has a ₹103 crore balance.
• Hence, this proposal is aimed to exclude high net-worth individuals(HNIs) from the benefit of high tax-free interest income on their large contributions.

Employee Provident Fund(EPF) Scheme:

• EPF is a social security scheme under the Employees’ Provident Funds and Miscellaneous Provisions Act,1952
• Managed by: The scheme is managed under the aegis of Employees’ Provident Fund Organization (EPFO).
• Coverage: EPF accounts are mandatory for employees earning up to ₹15,000 a month in firms with over 20 workers.
• Contribution: Under the scheme, an employee has to pay a 12% contribution towards the scheme. An equal contribution is paid by the employer. The employee gets a lump sum amount including self and employer’s contribution with interest on both on retirement.
• Limit on Employer’s Contribution: In Budget 2020, the government had capped the contributions by employers into funds EPF or the National Pension Scheme at ₹7.5 lakh a year.
  • However, government, as well as private-sector employees, are allowed to make voluntary contributions over and above the statutory deductions into the general provident fund(GPF) or EPF respectively.

Source: The Hindu

Synopsis: The recently released budget appears to be fairly normal. Normal is not sufficient for the abnormal times like the present.

Introduction

The economy contracted by 7.7% in India. The economic survey projects India’s real GDP growth to be 11% in 2021-22. However, this projection looks overestimated. India will have to surpass pre-covid-19 levels to achieve this growth; this will take at least two years.

• The budget required non-standard policy responses given the abnormal times for the economy. However, no such major changes were made to the budget.
• There is only a 1% increase in the overall expenditure of the government.

What are the issues in the budget?

The increase in capital expenditure is expected to be channelized through Investment in infrastructure, However, it is linked with 2 types of risks;

• If there is a delay in the completion of projects, it will lead to more spending.
• It will not provide instant multiplier effects to lift the demand. As the life cycle of these projects is very long.

There are no drastic reforms for the agriculture sector. For example, no rationalizing of the Public Distribution System issue prices of food grains.

• The cash transfers under the Pradhan Mantri Kisan Samman Nidhi Scheme (PM-KISAN) have not been increased.

Second, manufacturing growth would depend totally on private investments.

• There is a lack of concrete policies towards export promotion in the textile sector. This may weaken the competitiveness of manufacturing exports.

Infrastructure provisioning has unaddressed issues such as execution risk and regulatory issues. The introduction of a development finance institution addresses only one issue.

There is no proper plan to tackle urban unemployment. Employment and demand generation will depend on the impulses of growth cycles.

The target of reducing the fiscal deficit from 9.5% to 6.8% of GDP depends upon hypothetical factors, such as:

• • Total revenue might get some boost from better tax revenue.
  • A renewed hope for better divestment revenues.

The Budget sets out some impressive plans but does not provide the specific mechanisms to achieve those plans.

Although the Budget sets fixed some grand targets, it does not provide the precise mechanisms to achieve those.

Budget 2021: Despite some hits, the Budget has crucial misses

Source: The Hindu

Gs2: Parliament and State Legislatures- Budgeting

Synopsis: The evaluation of Budget 2021 is done on three parameters. First, on the credibility of the Budget. Second, it’s potential to deliver adequate domestic output and jobs. Third, on how the Budget raises resources.

What is the Credibility of the Budget 2021?

• Budget 2021 scores high on credibility. Because, unlike previous budgets, Budget 2021 has taken into account the real estimates of revenue receipts. Moreover, it has recognised the ‘off-balance sheet’ expenditures.
• This has resulted in arriving at real fiscal deficit numbers that are much higher than expected. It is 9.5% of the GDP for FY21 and 6.8% of the GDP for FY22. But disclosing real fiscal deficit has the following Significance
  1. One, realistic revenue budgets will reduce the pressure on tax authorities to engage in tax terrorism.
  2. Two, it will allow governments to release its payments and refunds on time.
  3. Three, focus on the ‘real’ numbers will help in informed decision-making and planning to improve our fiscal balance.

Steps taken to provide adequate domestic output and jobs

1. Budget 2021 signals a shift away from the revenue expenditure towards Capital Expenditure. Capital expenditure in FY22 is budgeted to increase by 26% over FY21 due to increased focus on areas such as infrastructure, roads, and textile parks.
2. The budget also promises to improve health, education, nutrition and urban infrastructure.
3. Along with this, efforts are being made to increase domestic jobs. It includes reform of labour laws, corporate tax rate cuts, and production-linked incentives.

What steps were taken to raise resources and improve investment?

• The Budget focuses to raise resources through disinvestment and asset sales, rather than via additional taxes. It reduces the tax burden on people.
• The Finance Minister also announced the creation of a new Development Financial Institution to facilitate and fund infrastructure investments.
• There were also efforts to revive our stressed financial services ecosystem. The Finance Minister announced the creation of a government Asset Reconstruction Company, or ‘bad bank’, to reduce the non-performing assets that are spread throughout the industry.

Way forward:

• The government should also help to revive other sectors who are suffering from chronic stress. Examples are financial services, power, real estate, telecom, airlines and shipping, contact-based services and micro, small and medium enterprises.
• Also, taking lessons from the global financial crisis in 2008, the government should not assume that a revival in consumption and government spending would automatically result in durable growth. Hence, the Government needs to make efforts to ensure adequate growth in domestic output and jobs.

Source: The Hindu

Gs2: Parliament and State Legislatures- Budgeting

Synopsis:  A close analysis of Budget 2021 reveals that the Government is following the principle of fiscal conservatism. The policy of Fiscal spending was the need of the hour.

Why the government resorts to fiscal conservatism?

Falling revenues had forced the government to restrict its aggregate spending. Some of the issues that contributed to falling revenues are,

• • • A sharp reduction in corporate tax rates in September 2019,
    • The underperformance of the Goods and Services Tax regime.
    • Failure of government’s ambitious disinvestment agenda. The government was only able to collect ₹32,000 crores last year, compared to the plan of ₹2.1-lakh crore.
    • The mandate of Fiscal Responsibility and Budget Management (FRBM) Act to reduce the fiscal deficit.

Because of the above reasons the Total expenditure for 2021-22 is projected to rise only by just 0.95% compared to revised estimates for 2020-21.

What are the signs of a continuation of Fiscal conservatism in Budget 2021?

1. First, Allocation to MGNREGA and Food subsidies:

• According to the Budget 2021-22, the allocations for the MGNREGA programme is drastically reduced from the ₹1,11,500 crore spent in 2020-21 to ₹73,300 crores in 2021-22.
• Similarly, the allocation for food subsidies has been reduced from ₹4,22,618 crore in 2020-21 to ₹2,42,836 crore in 2021-22.
• MGNREGA and food subsidies supported the vulnerable section in a big way, in survival during lockdowns.
• Experts see this as neglect of responsibilities by the government to support the vulnerable and marginalized people.

2. Second, Allocation to health and wellbeing

As per the Budget, the government has increased its spending on health and capital expenditure.

• Health spending increased by 137% compared to the previous year. (From ₹94,452 crore in 2020-21 to ₹2,23,846 crore in 2021-22)

However, closer scrutiny of budget allocations for health suggests otherwise. For example,

• The expenditure on the Jal Jeevan Mission is included as a part ‘Health and Wellbeing’ expenditure. It has magnified the figures on Health expenditure.
• Also, an increase in Budget spending on Health is not reflected equally in the allocation for the Department of Health and Family Welfare. For example, the Budget estimate of the Department of Health and Family Welfare for 2021, shows a mere increase of 9.6% compared to last year.

3. Third, the allocation for infrastructure investment

As per the budget, Capital spending is increased by 35% compared to the previous year. (from ₹4.12-lakh crore in 2020-21 to ₹5.54-lakh crore in 2021-22)

But the Budget estimate for infrastructure will also not be adequate. Because of the following reasons,

• The government is planning to finance new investments in infrastructure through disinvestments of equity, strategic sale, and privatization of the public financial sector. It is expected to yield ₹1.75-lakh crore in 2021-22.
• However, after looking at the past performance of disinvestment targets,  It is an overambitious target.

Even before the Pandemic recedes, the government seems on the path to restoring the old normal. i.e., Fiscal Conservatism. It is still continuing with the same path.

Source: click here

Syllabus: GS – 3 – Economy

Synopsis: The recently released budget has got a few things right, but there are some issues as well.

Introduction

The government’s response to distress in the economy was below expectations. Public spending was just over 1% of GDP. It was in a situation when GDP growth was in the negative zone and the unemployment rate was high.

In this budget, the government has proposed increasing public investment by 34.5% in the upcoming fiscal year. It is a positive step for the economy.

However, the finances for investment depend upon several factors like tax revenue, Disinvestment proceeds, Sale of rail and road assets, etc.

How this Public Investment would be realized?

1. Firstly, the government would increase public investment by borrowing. It will be an additional ₹80,000 crore for the purpose in the next two months.
2. Secondly, states will be allowed a higher fiscal deficit, in the case of capital expenditure. If the capital expenditure plan outlined in the Budget speech is implemented with assured financial backing, it could revive the investment cycle.
3. Third, the Development Finance Institution (DFI) proposed in the budget. There was a lack of long term credit for infrastructure in the last decade. The most successful industrializing economies have been utilizing DFIs for providing long-term credit.

What are the issues in the budget?

• First, DFI mentioned in the budget will be financed by foreign portfolio investments (FPI), which is a cause for concern. FPI represents short term inflows with exchange rate risks. This investment will certainly lead to currency and maturity miss-match, increasing the cost of capital.
• Second, the NFHS data for 2019-20 indicated that constructing toilets in households is of no use unless adequate access to water and sewage facilities are provided. Thus, the effectiveness of such investments depends upon coordination with other facilities.
• Third, the Budget has not mentioned the unemployment and migration crisis due to pandemics which led to the rise in economic inequality. The budget did not consider a special tax on the super-rich.
• Fourth, there is no targeted employment program to alleviate the immediate crisis is a matter of concern.

Way forward

• There is a need to consider alternative long-term sources, preferably from domestic sources, or international development agencies to make DFI a success.

Why in News?
Cairn Energy has asked the Government of India to resolve the retrospective taxation case. It has threatened to begin attaching Indian assets including bank accounts in different world capitals in case of non-resolution.

Background:

• The Permanent Court of Arbitration ruled in Dec. 2020 that the Indian government was wrong in imposing a retrospective tax on Cairn. It also asked the Indian government to pay for the damages to Cairn.
• Finance Ministry had said the government would study the verdict. It will take any action only after that.

Further Reading on Cairns Issue

What has Cairns said now?

• Now, Cairns has said that in case of inaction by India, it may take an extreme step such as attaching Indian assets including bank accounts in different world capitals.
• It has also cited clauses in the U.K.-India Bilateral Investment Treaty and the New York Convention to which India is a signatory.

Retrospective Taxation:

• It allows a country to pass a rule on taxing certain products, items, or services. This taxation is applied to the companies from a previous date i.e. before the date on which the law is passed.
• Countries correct anomalies in their taxation policies in the past by this step.
• Many other countries like the USA, the UK, the Netherlands, Canada, Belgium, Australia, and Italy have retrospectively taxed companies.

New York Convention:

• United Nations diplomatic conference adopted this convention in 1958 and entered into force in 1959.
• The Convention’s principal aim is that foreign and non-domestic arbitral awards will not be discriminated against. It obliges Parties to ensure such awards are recognized and generally capable of enforcement in their jurisdiction in the same way as domestic awards.

Source: The Hindu

Disinvestment

• It means sale or liquidation of the public assets by the government. These are usually Central and state public sector enterprises, projects or other fixed assets.
• The government can sell its shares, where it is the majority shareholder (Owns more than 51% of shares). For example, Air India, Bharat Petroleum, Delhi Metro Rail Corporation, etc.
• The government can either reduce its share by selling a part of the company or can transfer its ownership to the highest bidder.

Main objectives of Disinvestment in India:

• • Reducing the fiscal burden on the exchequer
  • Improving public finances
  • To improve the overall efficiency of PSUs
  • Funding growth and development programmes
  • Maintaining and promoting competition in the market
• Nodal Department: Department of Investment and Public Asset Management(DIPAM) under the Ministry of Finance, handles the disinvestment-related works for the government.

Are Disinvestments targets met by the government?

• Except in a few years, the government fails to reach the disinvestment target each year.
• In the current year of 2020-21, less than 3% of the targeted revenue is generated through disinvestment as of November 2020.

Source: Indian Express

Off Budget Borrowings:

• These are loans that are taken not by the Centre directly and are not calculated under the budget.  These loans are taken by PSUs or other public institutions on the directions of the central government. Such borrowings are used to fulfill the expenditure needs of these institutions.
• Are these borrowings included in the fiscal deficit? The liability to repay these loans is not formally on the Centre. Thus, they are not included in the national fiscal deficit. This helps keep the country’s fiscal deficit within acceptable limits.
• CAG Report: In 2019, Comptroller and Auditor General report has pointed out that this route of financing puts major sources of funds outside the control of Parliament.
• How are off-budget borrowings raised? The government can ask a PSU to raise the required funds from the market through loans or by issuing bonds.
  • Example: In the Budget 2020-21, the government paid only half the amount budgeted for the food subsidy bill to the Food Corporation of India. The shortfall was met through a loan from the National Small Savings Fund. This allowed the Centre to halve its food subsidy bill.
• What will be the fiscal deficit if we include off-budget borrowings? Due to various sources of off-budget borrowing, the true fiscal deficit is difficult to calculate. However, in July 2019, the CAG had pegged the actual fiscal deficit for 2017-18 at 5.85% of GDP instead of the government version of 3.46%.

Source: Indian Express

Synopsis –The macro-implication of K-shaped recovery and labour market pressure. How the government budget will deal with it? 

Introduction-   

• COVID Vs Economic Mobility – India has broken the link between COVID virus proliferation and mobility earlier and more successfully. 
• India’s GDP estimates for 2020-21 show that the economy is expected to perform much better than earlier projections. 
• However, the present economic recovery is very hopeful developments but, juxtaposed with a stronger-than-expected recovery, is confirmation of labour market scarring. 

What are the present economic developments in India?  

• Industrial sector - The large firms have endured the crisis better and are gaining market share at the expense of smaller firms.  

• • • Although it will increase medium-term productivity, but it will also increase the dominance/pricing power of big companies in the market.  

• Employment – CMIE’s [Centre for Monitoring Indian Economy] labour market survey reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels.  

• • • These labor market projections not incompatible with a sharper near-term rebound, as this recovery is led by capital and profits, not labour and wages 

• Household sector – Households at the top of the pyramid are seen their incomes largely protected, and savings rates forced up during the lockdown, increasing ‘fuel in the tank’ to drive future consumption. 

• • • Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes. 

What are the implications of a K-shaped recovery? 

K-shaped recovery happens when, following a recession, different sections of an economy recover at starkly different rates or magnitudes. The macro-implication of K-shape recovery in India are- 

• Firstly, issue of Income- Upper-income households have benefitted from higher savings for two quarters. Present recovery is led by these savings.  

• • • But lower-income households  are facing loss of income in the forms of jobs and wage cuts. This will be a recurring drag on demand, if the labour market does not heal faster. 

• Second, the issue of Consumption– To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-hindering because the poor have a higher marginal propensity to consume (i.e. they tend to spend (instead of saving) compared to higher marginal propensity to import among rich.  

• • • Consumption pattern– Passenger vehicle registrations (proxying upper-end consumption) have grown about 4 per cent since October while two-wheelers have contracted 15 per cent. 

• Third, increases the inequality– COVID-19 reduces competition or increases the inequality of incomes and opportunities between rich and poor. 

• • • This could affect the trend growth in developing economies by hurting productivity and tightening political economy constraints. 

 How upcoming budget may help India to deal with K Shape recovery?  

Policy needs to look beyond the next few quarters and anticipate the state of the macroeconomy post the sugar rush, for the wellbeing of poor citizens and increase its income level. 

• First, Policy will look for the private sector to start re-investing and re-hiring, and thereby sets the economy onto a more virtuous path. Barring that, the labor-market hysteresis could sustain with the manufacturing and service sectors. 

• • Private investment revival policy may be implemented first for recovery of the private sector. 

• Second, Ensure exports should benefit from increasing global growth as the world gets vaccinated steadily.  
• Third, Government may invest in large physical and social (health and education) infrastructure push. It may provide employment for who lost job due to COVID. It may reduce inequalities. 

• Fourth, a reliable medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability. 
• Lastly, the investment model for public investment must be balanced to push and financed by aggressive public asset sales.

Read Also :upsc syllabus pdf

News: Government has roped in the Income Tax Department to tap illicit incomes as part of a crackdown against fraud companies rigging the Goods and Services Tax (GST) regime.

Facts:

• How did fraudsters cheat the Government? They have floated multiple dummy firms, obtained GST registrations, issued fake GST invoices without actual supply of services and passed on ineligible Input Tax Credit(ITC) accrued from the bogus invoices to clients for a commission who subsequently used it to make GST payments causing losses to the government.
• Reason for these frauds:
  • Lack of due diligence during the GST registration: The process of registration was made easy and hassle-free by the government so that businesses could be easily on-boarded to the system. However, this meant that a number of dummy companies too obtained the GST registration in the absence of scrutiny or physical verification of the registered address of the companies.
  • Lack of data exchange among the enforcement agencies and banks have also led to increase in fraud cases.
• What action has the government taken on this?
  • Government has said that any income traceable to the use of fake bills and other GST frauds shall be considered concealed income and will attract severe penalties.
  • Government has also tightened the GST registration process and legal measures to deal with the rising cases of fake invoicing.

Article source

Synopsis: Government should adopt a fiscal stimulus Path for the economic recovery of India, to make our economy grow at 9% GDP in the coming years. 

Background 

• The impact of the pandemic has pushed India to impose stringent lockdown measures to save millions of lives of Indian citizens but it’s after effect has caused massive economic disruption. 
• This has resulted in fall of GDP by around 7.5 percent for this full year which has dented our aspiration to become a$5 trillion economy by 2024. 
• Though nothing much can be done for what has happened, in the coming years India needs to get back to the trend line of growth (pre-COVID years) to sustain the aspiration of our young population.

How different sectors are performing currently? 

• The sectors which have shown a positive sign of recovery are
  • • Pharmaceuticals and chemicals, the FMCG sector, the two-wheeler sector, Construction equipment’s driven by rural demand from sales to individuals, Capital goods.
• In contrast, Sectors that are still struggling for a full recovery are
  • • Mainly, the travel and tourism sector, real estate and construction sector, and retail which are significantly high employment sectors.

So, what steps must the government take?  

Though the recovery underway is solid, but we need measures to sustain and deepen it. The government can do three things. 

• First, the government should resort to fiscal stimulus by paying long-overdue government bills. Few examples are, 
  • • Distribute the pending tax refunds, pay the bills of all companies (large and small), pay off the many arbitration award spending where the government has lost cases, and pay state governments their pending GST dues. 
• Second, invest in public health infrastructure and centre should finance state government efforts to build an extensive public health network. 
  • • While this will equip as to handle a possible second wave of the virus, on the other, it will spread confidence.  
    • Also, it is essential for the government to work in partnership with private sector hospitals.
• Third, invest massively in infrastructures such as roads, ports, logistics. Areas, where investment can be channelised, are,
  • • By Providing decent, accessible housing to improve the living conditions in slums across our cities by providing right public-private program.
    • By providing cheap connectivity into our cities.
    • Even, the 20 trillion infrastructure pipeline project that requires massive funding can be considered.

How the funds for the above will be sourced?  

• To mobilize its resources that are needed to finance the above measures, the government can opt for a huge privatization programme (Disinvestment) 
  • • Under this program, the government should intend to reduce its share-holding to 26 percent across public-sector banks, steel companies, oil companies, and every manufacturing company and hotel it currently owns. 
    • This announcement might trigger a big rally in the stock prices of PSUs, increasing return. 
• To stem the protests due to big reforms,we are witnessing currently, the government should choose democratic methods for implementing them such as use of discussion papers for public comment, the debate in Parliament.   

We need to act swiftly to regain from stunted recovery. We must use our economic crisis as an opportunity to set some bigger things right that we have ignored for too long. 

Context- India’s low level of fiscal spending could leave behind other problem and leads to inequality.

India has stood out in three distinct ways.

• Firstly, India seems to have broken the link between rising levels of mobility and COVID-19 cases. As of now the fear of increased mobility around the festive season stoking cases has not come to bear and the fatality rate continues to fall as the recovery rate rises.
• Secondly, India has seen amongst the smallest fiscal support packages globally, government expenditure has not grown in the year so far.
• Third, inflation is now a big problem, CPI inflation has been outside the 2-6% tolerance band for seven months in a row.

How small fiscal support link with inequality?

1. The government’s fiscal packages were far too modest and indirect to achieve much, some part was not covered (like the urban poor), and overall outlays were small.
2. Rise in inequality between large and small firms –Large listed firms saw a larger rise in profits and the smaller listed firms did not do as well.

• A combination of cost-cutting, lower interest rate environment, access to buoyant capital markets, and formalization of demand could also be a driver of the rise in individual-level inequality.
• Impacted larger number of people– small firms are more labour-intensive than large firms. Data shows that small firms have cut staff costs by much more than large firms.

3. Widening wealth gap– The coronavirus pandemic has dealt a huge blow to India’s middle and low-income groups. This is likely to further widen the wealth gap between India’s rich and poor.

• For instance– Expensive passenger vehicle sales doing better than two-wheeler sales.

What are the negatives of rising inequality?

1. Inequality could elevate inflation- People with higher incomes can offset rising inflation with rising incomes. Sadly, though, income inequality and rising inflation can entrap lower-income households in poverty.

• For example– India has had a troubled past with services inflation. once it takes a stronghold (for instance, in 2011), it remains elevated for a prolonged period (it averaged 7.7% in the 2011-13 period).

There are three possible reasons that services inflation rises quickly in 2021-

1. Inequality could stroke prices– The large firms and their employees do relatively well through this period, they are likely to demand more services, stoking services inflation.
2. Pent up service demand– As a vaccine comes into play, there could be a wave of pent-up (high-touch) services demand.
3. The service providers did not do the regular annual price reset in 2020, and may do it jointly for two years, once demand picks up.

What need to be done?

1. Inflation control could be the main task cut out for policymakers in 2021.
2. RBI have to take steps to gradually drain the excess liquidity in the banking sector, provide a floor for short end rates and finally narrow the policy rate corridor by raising the reverse repo rate.

Context: After Vodafone, India has lost its 2nd case to Cairn Plc at Permanent Court of Arbitration over a retrospective tax demand. Now, what are the options left with India and which one should it chose? 

WHAT ARE THE CASES IN QUESTION? 

• Very recently, Cairn Plc has won a case of retrospective tax against India at Permanent Court of Arbitration. Court has asked Indian government to pay for damages to the tune of $1.4 billion. 
• Previously in this year only, Indian Government lost a retrospective taxation case to Vodafone, where government need to pay around ₹80 crore, if it doesn’t make any further appeal.   

Now India has been left with the option of either conceding defeat and making payment to the companies or making further appeals. But cost-benefit analysis of both the option is necessary. 

Read More – India lost Retrospective taxation case to Cairn 

WHY GOVERNMENT SHOULD NOT MAKE ANY FURTHER APPEALS? 

• Firstly, there is a need for attracting global investments to the country and any further appeal would put investors in a doubt. 
• Secondly, the stance of the present government on the issue was different in the past. They called out the UPA government for setting free “tax terrorism” and “uncertainty” in the country by enacting retrospective taxation. 

• The Centre has now filed an appeal in the Vodafone matter in Singapore because it cannot take a different stance on two similar cases. A similar appeal too can be expected on Cairn. 

• Thirdly, it would further dampen India’s reputation as the court already noted that this was a breach of fair treatment under the UK-India bilateral investment treaty. 

WHY GOVERNMENT SHOULD MAKE FURTHER APPEALS? 

• Keeping in mind the cost on exchequer, the government should make further appeals. This verdict includes a sharp $1.4 billion payable as damages to Cairn. 

• In the Vodafone case, the government would need to divide out around ₹80 crore if it were to accept defeat. 

• Finance Minister Nirmala Sitharaman has repeatedly stated that India retains the supreme right to put taxes. 

As a first step after this setback, government must analyse carefully all the available options with it, as India is already suffering from an economic slowdown and looking to strengthen its domestic manufacturing capability. Some of the available options might turn away the foreign investment and technology associated with it. 

Synopsis: In a 2nd setback after Vodafone case, Indian government has lost an International arbitration case to energy giant Cairn, on the issue of retrospective taxation.  

Introduction 

• The Indian government has lost an international arbitration case to energy giant Cairn Plc over the retrospective levy of taxes, and has been asked to pay damages worth RS. 8000 crore to the UK firm. 
• This is the second setback for Indian government related to retrospective taxation after it lost the arbitration case against Vodafone. 

What is retrospective taxation?  

Retrospective taxation allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed. 

• Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes. 

Apart from India, many countries including the USA, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies. 

What is the case? 

The case pertains to the tax demand related to an alleged Rs24,500 crore worth capital gains it made in 2006 while transferring all its shares of Cairn India Holdings to a new company, Cairn India, and got it listed on the stock exchanges.  

However, Cairn argued the retroactive application of a newly enacted law is a breach by India of its obligations under the Treaty [UK-India Bilateral Investment Treaty] to treat Cairn and its investments fairly and equitably and refrain from unlawfully expropriating Cairn’s assets.  

• Owing to different interpretations of capital gains, the company refused to pay the tax. 
• This prompted cases being filed at the Income Tax Appellate Tribunal (ITAT) and the High Court. 

What is the verdict of Court? 

The Permanent Court of Arbitration at The Hague has maintained that the Cairn tax issue is not a tax dispute but a tax-related investment dispute and, hence, it falls under its jurisdiction. 

• India’s demand in past taxes, it said, was in breach of fair treatment under the UK-India Bilateral Investment Treaty. 
• The GOI was ordered to compensate for the total harm suffered together with interest and cost of arbitration.  

The order does not contain a provision for challenge or appeal. Moreover, Cairn can use the arbitration award to approach courts in countries such as the UK to seize any property owned by India overseas to recover the money if the award is not honored.  

Way forward- 

Government needs to assured global investors that concerns over retrospective taxation would be taken care of. 

What are the issues facing Indian Economy?

• COVID pandemic has pulled down the global economy and India’s economy is one of the worst affected among them.
• In the first quarter of the financial year (April-June), India’s economy had contracted by an unprecedented 23.9%. Whereas in the second quarter, after a bit improvement, economy contracted by 7.5%, less than the anticipation.
• With the result of 2^nd quarter, India has slipped into the Technical recession, which requires economy to be negative or declining for two consecutive quarters or more.
• Although some economist argue that when growth rate is measured on quarterly basis, instead of year-on-year basis, India’s GDP plunged 25 per cent in 2Q20 and recovered by 21 per cent in 3Q20. Thus, India’s economy is not in the technical recession.

Before we move any further in this article to understand the causes behind slowing Indian Economy, first we need to understand the components of the GDP.

How to calculate GDP using Expenditure method?

Final goods and services produced in a country during a period of time are taken into account under expenditure method of calculating National Income or Gross Domestic Product. In this method final expenditure made by each stakeholder is taken into account.

Final expenditure is that part of expenditure which is undertaken not for intermediate purposes.

Following is the formula for calculating GDP by expenditure method;

GDP = C + I + G + (X − M)

1. C (Consumption) represents the consumption expenditure by the households on Final goods and services, known as Private Final Consumption Expenditure (PFCE).

PFCE is the biggest component of the GDP and constitute around 55-57% of the GDP.

2. I (Investment) represents business investment on equipment. It includes Gross Fixed Capital Formation (GFCF) and Inventory.

• GFCF includes Investment made in the long-term assets by government and private sector and investment in residential units by business or households.
• Inventory investment includes investment for procuring raw materials and finished or unfinished goods.

Investment constitute around 30-32% of the GDP.

GFCF Includes investments from Government, Businesses and households. 25% of I is constituted by government investment (Centre, states and PSUs) and 35-40% each is that by the corporate (India Inc.) and non-corporate (MSMEs and household investment in real estate) private sector.

3. G (Government) represents sum of government expenditures on final goods and services including salaries, weapons, investments, etc., also known as Government Final Consumption Expenditure (GFCE).

It doesn’t include the investment in financial products.

GFCE constitute around 10-12% of India’s GDP.

4. X represents gross exports and M represents gross imports. Balance of both is called net exports.

What are the causes behind falling GDP growth?

Demand related issues (PFCE)

• Consumer demand is falling in urban India. Sales of domestic cars and commercial vehicles are on decline even before COVID pandemic. More than 2.1 crore individuals have lost salaried jobs due to the pandemic since April, and economists estimate the number to increase in future as companies struggle to run smoothly.
• While many of those didn’t lose their jobs, saw their salaries drastically reduced.
• Wage growth rate in rural area has declined to a new low. 10 million more rural households are seeking MGNREGA employment per month since August compared to a year ago.

Effect on the GDP

• Fall in income of households is leading to drastic fall in aggregate demand for goods and services i.e. Private Final Consumption Expenditure (PFCE). PFCE remains in the negative territory, at -11.3% in Q2. Private consumption demand, is the mainstay of the economy as it contributes around 55-60% of GDP.
• Loans for households are although easily available after government stimulus package, but due to uncertainty of the future income and savings, people are apprehensive of taking loans at present.

Investment and supply related issues (GFCF)

• Growth rate in eight core sectors is sluggish. That means even if the demand is improving industries will not be in the position to meet those demands.
• As per All India Manufacturers Organization’s June survey, about one-third of small and medium-sized enterprises indicated that their businesses were beyond saving.
• Unorganised sector, which is specifically dependent upon daily cash flows and lacking organised fund sources like loans and finance from the institutions, has been badly affected. This sector was already badly affected by demonetisation and GST, COVID pandemic has reduced the possibility of revival of many firms working in this sector.

Impact on the GDP

• Gross Fixed Capital Formation (as % of GDP) had been on a constant decline (except in 2018) between 2014 and 2019, falling from 30.1% to 27.4%. In Financial year of 2020-21, GFCF was contracted by 7.3% in Q2, compared to 47.1% in Q1.

Government expenditure related issues (GFCE)

• The central government’s total expenditure (both revenue and capital) has been declining sharply since 2010-11. From a high of 15.4% of the GDP in 2010-11, the total expenditure has hit a low of 12.2% of the GDP in 2018-19.
• The capital expenditure component has dropped from 2% of the GDP in 2010-11 to 1.6% in 2018-19 and that of the revenue expenditure from 13.4% in 2010-11 to 10.6% in 2018-19.
• This decline in expenditure is driven by the government’s priority to contain fiscal deficit.

Impact on the GDP

• Most worrying part for economy is a fall in government spending. Although government has announced stimulus package for revival of economy, but actual fiscal support has not been commensurate as expected. Government-Fixed Capital Expenditure (GFCE) growth has declined by 22.2% in 2^nd quarter after improvement of 16% in the first Quarter.

Why government is not able to provide direct fiscal support?

• Centre’s net revenue (tax and non-tax) collection for the first half of this fiscal is merely 27.3 per cent of the budget for the full fiscal year.
• Center’s capital expenditure has registered a decline of 11.6 per cent.  Capital expenditure is defined as the money spent on the acquisition of assets as well as fresh investments
• Market borrowings of both the Centre’s as well as the states’ have increased by 50 per cent year-on-year basis. Due to that India’s public debt/GDP will likely reach around 85 per cent. High debt-servicing costs will further crowd out productive public expenditure.
• Central government fiscal deficit is also inflating.

Why there is a need of direct income support from the government?

Although government has announced stimulus package for revival of the economy that includes benefits for industries, poor people and MSMEs etc., however all these benefits may not be able to provide economy with the immediate boost required at this point of time;

• At times of slowdown in industrialised economies, there is idle productive capacity on the one hand and unemployed manpower on the other.
• Unemployment reduces the purchasing power capacity of the households, resulting in low aggregate demand.
• Increase in Government expenditure or investment on infrastructure lead to expansion of productive capacity and generate long-term economic growth.
• While the infrastructure spending and reforms are critical to sustain medium and long term growth, neither can boost near-term demand. A stimulus package focused on giving direct benefits to the middle-class could help alleviate the situation.
• Increase in direct benefit transfers to people lead to immediate increase in aggregate demand of household for goods and services. Increase in aggregate demand leads to fuller utilization of the existing productive ca­pacity and employment generation.
• Thus, Fiscal spending (government expenditure), as against fiscal conservatism, is favoured because this can be mobilised quickly to deliver results in a shorter timespan while others need longer timeframes to get activated and deliver.
• Bank recapitalisation for increasing credit flow in the economy is another way to boost demand in the economy.

Way forward

Present time demands government to discontinue its fiscal conservatism approach centred on reducing its fiscal deficit. It is the time to boost the domestic demand by transferring direct benefits, as was done during the 2008 economic recession. Indian economy at that time proved to be resilient and performed far better compared to many developed countries at that time.

Private sector in India is not lacking funds as is the popular perception. It is the lack of confidence in the Indian economy and industries at present that investment in India are reducing. There are sufficient funds available for the government borrowings in the market.

Context: Need to modernise India’s archaic tax laws.

Background:

• The Income Tax Act was framed in 1961 and has been amended several times.
• The government constituted the Akhilesh Ranjan Task Force to suggest reforms to the Income Tax Act.
• The report has been submitted to the government but has not yet been made public.

People who gained during the Pandemic?

• India’s super rich: Between January and June 2020, 85 new Indians were added to the list of High Net worth Individuals (with a net worth of more than $50 million).
• Stock dealers: When the Indian GDP was contracting, some stocks surged to phenomenal heights there by benefitting those dealing in stock exchanges.
• The corporate houses, Internet service providers, laptop makers and scientists engaged in medical research also gained.
• The manufacturers of masks and Personal Protective Equipment also gained during the pandemic

What are the problems in taxation?

• Implementation of Equalisation Levy: Through Digitalisation and e-commerce multilateral corporates have found an easy way to make big money. However, the tax administration is struggling with the implementation of the equalisation levy.
• Implementation of Anti profiteering rules under GST: As per the Goods and Services Tax (GST) law, any reduction in the rate of tax on the supply of goods or services has to be passed on to the consumer by way of commensurate reduction in prices. Companies are getting benefited from GST rate reduction without passing on the benefits to the end consumers.
• Tax evasion: Tax avoidance by global web companies has become acute because of Digitalisation.
• Tax dispute settlement: The International Court of Arbitration ruled that the Indian government’s move to seek taxes from Vodafone using retrospective legislation was against the fairness principle.

What can be done?

• Digital taxation has to be amended in accordance with the UN Model Convention. There is need for India to act in sync with the OECD.
• The Anti-Profiteering Rules have to be implemented vigorously wherever there is reduction in the tax rate on any commodity or service
• Need to find a suitable mechanism to negotiate settlement through mediation or conciliation or, if necessary, arbitration in connection with tax disputes between the tax-paying companies and the Central Board of Direct Taxes.

Our archaic laws should be modernised and made compatible with international tax laws. The suggestions made by Akhilesh Ranjan Task Force needs to be implemented after wide consultation.

Context – The Government’s core belief in ‘minimum government’, which ties its hands when it comes to fiscal measures even in such harsh economic conditions.

What are the reasons for the failure of stimulus packages?

1. Lack of Demand– The aggregate demand for goods and services again is dependent on the income and purchasing power of people, which has come down drastically, at the aggregative level, due to the COVID-19 lockdown.

• Nothing to stimulate demand – many economists have opined that the government stimulus tries to resolve only supply-side issues. There is nothing to generate demand. This could only be done by putting money in the hands of people.

2. Risk of taking housing loans – Though the consumer or housing loans are easily available at lower rates of interest, still people are not taking the household loans, as they are in doubt of their future incomes or dwindling current one.
3. Bank burdened with bad loans- On the supply side, the big constraint on fresh lending is the burden of non-performing assets (NPAs).
4. Credit easing will not work immediately– Credit easing by the RBI is not direct government expenditure and banks will be hesitant to lend the money available with them.

What are the possible solutions?

1. Relax FRBM target– Fiscal Responsibility and Budget Management (FRBM) should be kept in a state of suspension for both Centre and the States.
2. Cash transfer to Households– The government needs to announce a ₹10 lakh crore fiscal stimulus package providing universal food ration and cash transfers for households in order to revive the economy at this time.
3. An urban employment guarantee law– This could help improves worker incomes and have multiplier effects on the economy.
4. Improving health infrastructure– The government needs to build a robust public health infrastructure on the principle of public provisioning instead of walking down the insurance route.
5. Investment in Green Deal- – A comprehensive green deal can be planned, which changes the energy mix of the economy and also makes the poor and the marginalized a part of a sustainable development process.

Way forward-

The current COVID-19 pandemic has given an opportunity to rethink of health, economic and climate policies.

Context- Finance Minister Nirmala Sitharaman announced the next set of stimulus package to boost the coronavirus-hit economy.

What are the key highlights of 3^rd stimulus package?

Union Finance Minister on recently announced a third stimulus package to help pull the Covid-19-battered economy. The FM announced 12 measures under Atmanirbhar Bharat3.0 which includes-

1. Atmanirbhar Bharat Rozgar Yojana.
2. Emergency Credit Line Guarantee Scheme (ECLGS) 2.0.
3. Atmanirbhar Manufacturing Production-Linked Incentives for 10 champion sectors.
4. To boost demand in Real Estate sector, relief for home buyers and sellers.
5. Support for construction and Infrastructure- Relaxation of EMDs and Performance Security on government tenders.
6. Income tax relief for homebuyers and developers.
7. Infrastructure Debt Financing.
8. Support for Agriculture.
9. Boost for rural employment.
10. Boost for Project Exports.
11. Capital and Industrial Stimulus.
12. Research and Development grant for Covid-19 vaccine.

Previously announced package-

1. Pradhan Mantri Garib Kalyan Yojana (PMGKP) – The government had announced Rs 1.70 lakh crore during March to protect the poor and vulnerable sections from the impact of COVID-19 crisis.
2. The Aatmanirbhar Bharat Abhiyan package– The stimulus of Rs 20.97 lakh crore in May, largely focused on supply-side measures and long-term reforms.

What are the key areas of focus of this fiscal package?

1. Incentivizing job creation-

• Boost formal sector employment-Providing incentives to EPFO-registered firms to hire more employees could lead to job creation. Formalization of the existing informal work force in urban areas.
• MGNREGA boost– Further additional outlay of Rs 10,000 crores will be provided for PM Garib Kalyan Rozgar Yojana in the current financial year.

2. To boost demand in Real estate sector –

• Rs 18,000 crores additional outlay for PM Awas Yojana (Urban) over the Budget Estimates for 2020-21. This is over and above Rs 8,000 core already this year.
• This will help 12 lakh houses to be grounded and 18 lakhs to be complemented.
• The scheme will also guarantee additional jobs to 78 lakhs.

3. To boost manufacturing production-

• Production Linked Incentives with proposed expenditure of ₹1.46 lakh crore over five years will be offered to ten stressed sectors to boost domestic manufacturing.
• And create an efficient domestic manufacturing ecosystem.

4. To Research and Development grant for Covid-19 vaccine-

• Rs 900 crores provided for Covid-19 Suraksha Mission for the development of the Indian vaccine to the Department of Biotechnology.

5. Emergency Credit Line Guarantee Scheme (ECLGS) 2.0-

• EECLG 2.0 for MSMEs, businesses, MUDRA borrowers and individuals (loans for business purposes), has been extended till March 31, 2021.
• Under this credit scheme, banks will be able to lend to stressed sectors from 26 sectors identified by the K.V. Kamath committee earlier this year.
• The new scheme will have a 1-year moratorium and 5 years of repayment.

What are the challenges to India’s economic recovery according to RBI?

• The foremost risk stems from the global economy now at risk from the second wave of COVID-19.
• The Second major risk is the stress that has been intensifying among households and corporations

Way forward-

• Ensuring credit off-take of previously announced schemes amongst the poorest sections must be a priority.
• Forcing banks to lend to companies where assessing risk has become a challenge due to the pandemic puts banks at a bigger risk.

Context- With various measures the Centre government has reduced of the fiscal resource capacity of the States.

What are the reasons of weakened fiscal capacity of States?

1. Impact of Implementation of GST on States– Since implementation, the Goods and Services Tax appears to have reduced the resource-generating capacity of States and has contributed to worsening inter-State inequality
2. Centre undermines fiscal capacity of States-
3. Cutbacks in devolution – Centre has systematically cut the share of States in taxes raised by the Union government.

• Between 2014-15 and 2019-20, the States got ₹7,97,549 crore less than what was projected by the Finance Commission.

1. Shrinking of divisible pool- Centre has reduced the pool of funds to be shared with the States by shifting from taxes to cesses and surcharges.

• The Constitution allows the Centre to levy cess and surcharge which the Centre need not share with state governments.
• When taxes are replaced with cesses and surcharges, consumer pays the same price. But the Union government keeps more of that revenue and reduces the size of the divisible pool. As a result, the States lose out on their share.

1. GST shortfall–

• The GST Compensation Act, 2017guaranteed States that they would be compensated for any loss of revenue in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods.
• However, the economic slowdown has pushed both GST and cess collections down over the last year, resulting in a 40% gap last year between the compensation paid and cess collected.

3. Central grants are also likely to drop significantly this year.

• For instance,₹31,570 crore was allocated as annual grants to Karnataka. Actual grants may be down to ₹17,372 crore.

What are the Impacts of colossal borrowing on States?

• Repayment burden will overwhelm State budgets for several years.
• Budget issue – After paying loans and interest, salaries and pensions, and establishment expenses, nothing left for development and welfare.
• The fall in funds for development and welfare programmes will adversely impact-
• The livelihoods of crores of Indians.
• The economic growth potential cannot be fully realized.
• Adverse consequences will be felt in per capita income, human resource development and poverty

Way forward-

• The systematic weakening of States serves neither federalism nor national interest. Therefore, The Centre must take several steps to ensure an adequate flow of resources to states.
• Centre must immediately clear all its pending dues to state governments.

What is Cess?

• • A cess is an earmarked tax that is collected for a specific purpose and ought to be spent only for that.
  • Cess may initially go to the CFI but has to be used for the purpose for which it was collected.
  • Cess collections are supposed to be transferred to specified Reserve Funds that Parliament has approved for each of these levies.
  • Every cess is collected after Parliament has authorised its creation through an enabling legislation that specifies the purpose for which the funds are being raised.
  • Article 270 of the Constitution allows cess to be excluded from the purview of the divisible pool of taxes that the Union government must share with the States.

What is GST Compensation Cess?

• The Goods and Services Tax in India is a comprehensive, multi-stage, destination-based value-added indirect tax. It has replaced many central and state indirect taxes in India such as the excise duty, VAT, services tax, etc.
  GST compensation: As per the GST (Compensation to States) Act, 2017, states are guaranteed compensation for revenue loss on account of implementation of GST for a transition period of five years (2017-2022).
• The compensation is calculated based on the difference between the current states’ GST revenue and the protected revenue after estimating an annualised 14% growth rate from the base year of 2015-16.
• Any shortfall has to be compensated from the receipts of Compensation Cess imposed on selected commodities that attract a GST of 28 per cent.
• At present, the cess levied on sin and luxury goods such as tobacco and automobiles flow into the compensation fund.
• But the issue was created when during Pandemic govt. denied paying compensation cess due to low revenue collection.

News: The Central government has decided to borrow up to Rs 1.1 lakh crore on behalf of the states to meet the shortfall of Goods and Services Tax(GST) compensation.

Facts:

• Borrowing Mechanism: Under the Special Window, the estimated shortfall of Rs 1.1 lakh crore will be borrowed by Centre in appropriate tranches.The amount so borrowed will be passed on to the States as a back-to-back loan in lieu of GST Compensation Cess releases.
• Will the borrowing impact the fiscal deficit of the Centre? The borrowing will not have any impact on the fiscal deficit of the Centre as the amounts will be reflected as the capital receipts of the States and as part of the financing of its respective fiscal deficits.
• Significance: The Centre borrowing on behalf of states is likely to ensure that a single rate of borrowing is charged and this would also be easy to administer.

Additional Facts:

• GST Compensation Cess: Under the GST (Compensation to States) Act, 2017, states are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years between 2017 and 2022.At present, the cess levied on products considered to be ‘sin’ or luxury goods.

Source-Live Mint

Syllabus- GS 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context- India needs to create 90 million non-farm jobs by 2030 to avoid economic stagnation.

What is the importance of these two sectors?

• Construction- 24 million non-farm jobs could come from construction alone by 2030, 16 million from real estate and 8 million from infrastructure.
• Manufacturing- Thus sector could generate one-fifth of the incremental annual GDP (about $750 billion) and close to 11 million new non-farm jobs by 2030.

How India can trigger construction growth and what are the reforms needed?

To generate its share of employment, the construction sector needs to grow at about 8.5%, nearly double its 4.4% growth rate over financial years 2012-13 to 2018-19. The following steps can trigger this growth-

1. Spend about 8% of GDP on infrastructure annually for the next 10 years.
2. Build 25 million affordable homes over the decade.

Reforms required-

1. Real estate reforms-

• India could include generously increasing incentives for home-ownership and creating rental stock.
• Tax incentives– At the central level, substantially raising tax deductions limits on mortgages and rental incomes, as well as introducing tax incentives for investments in rental housing stock could be considered.

For example- The US, which offers tax-deductible interest of up to $750,000 on mortgage loans and an effective low-income housing tax credit incentive.

• Rationalizing stamp duties and registration fees, introducing regulatory amendments in rent-control policies, launching digitally-enabled, single-window clearances to reduce time delays in affordable housing construction.
• Bringing the goods and services tax on modern construction methods in line with in-situ buildings.

2. High land-price-to- average-income ratio– In terms of per square-meter price to per-capita GDP, it is about 6.0 in Mumbai and 3.8 in Bengaluru versus 0.5 in Bangkok and 0.2 in Beijing. To narrow this gap, India could do two things.

• Release 20 to 25% of underused but buildable public-sector land.
• Reform zoning regulations in the top 300 cities by population.

What are the proposed ways to turbocharge Manufacturing

1. Structural reforms– India could introduce targeted, time-bound and conditional incentives to reduce the cost disadvantage that Indian manufacturers face while competing with companies from China and Vietnam, among other countries.
2. Free trade warehousing zones– Indian states could also create powerful demonstration effects by establishing port-proximate manufacturing clusters that contain free-trade warehousing zones.

• They could provide land at lower costs, plug-and-play infrastructure, and common utilities, apart from expedited approvals.

3. Reduction in costs– India also needs to consider reducing its factor costs of power and logistics. Both these costs could be reduced 20–25% by enabling franchised and privatized distribution company models, reducing cross-subsidy surcharges, and establishing multi-modal freight ecosystems.

Way forward-

• If adequately set up for success, manufacturing and construction could be pivotal in driving India’s growth over the next decade.
• The government has to introduce sector-specific policies to raise productivity in manufacturing and real estate sectors.

Source- The Hindu Business Line

Syllabus- GS 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context- To decentralize decision-making and facilitate more informed investment decisions, the Centre has restructured the board of Steel Authority of India (SAIL).

How Privatization of SAIL can boost their business?

The Appointments Committee of the Cabinet (ACC) has approved the restructuring of the Board of Steel Authority of India Limited (SAIL).

1. Decentralization– This move will facilitate greater decentralization and nimble decision making with the directors-in-charge of plants as direct ACC appointees with their views having weight in the central corporate governance structure.
   • This will also facilitate speedy modernization and expansion programme of SAIL.
   • This decentralization will also ensure there is greater transparency.
2. Attract investment– The government’s exit will attract private investment and contribute to the exchequer, enabling higher public investment.

What is CPSEs?

Central public sector enterprises (CPSEs) are those companies in which the direct holding of the Central Government or other CPSEs is 51% or more.

Role- CPSEs have always played a crucial role in executing the socio-economic development agenda of the government as an extension of the government apparatus.

• During recent lockdown period, CPSEs ensured that essential services such as power, fuel and food-grain supply remain uninterrupted.
• They are carrying out capital expenditure works/infrastructure development activities of approximately ₹2 lakh crore in the sectors of petroleum, power, defence, mining, logistics, etc.
• CPSEs not only act as a catalyst for other economic activities but would also provide informal employment during the construction phase.

What are the arguments in favour of privatization?

1. Efficiency– One of the strongest arguments in favour of privatization aired by its supporters is the dismal performance of the PSEs and, thus, its inefficiency can be removed if these enterprises are privatized.
   • Governments jobs are often taken for granted and have no difference between a performer and a non-performer when considering productivity.
   • Privatization will usher in an improvement in efficiency and as improved performance is concerned with ‘profit-oriented’ decision-making strategy.
2. Lack of political interference– Indian PSEs are subject to too much governmental and political interference thereby making them operationally inefficient. Private sector is free from such unavoidable interference. They are motivated by political pressures rather than sound economic and business sense.

• A most important component in enhancing the performance of a PSU is reduced intervention by political powers and preventing misuse of infrastructure by all.

Way forward-

• Privatization has become a popular measure for solving the organizational problems of governments by reducing the role of the state and encouraging the growth of the private sector enterprises.
• Privatization should be in a unique form in accordance with the priorities of our mixed economy and as well as by considering operational aspects of the PSUs.

Source: Indian Express

Context: Recently, the Centre has acceded to the states’ request, that it will borrow Rs 1.1 lakh crore to compensate them for the shortfall in their GST revenues.

What is the Background?

• For bringing the states in to GST ambit, The Centre assured the states of a 14 per cent growth in their GST revenues.
• It also agreed to compensate states for shortfall in GST revenue collection for 5 years.
• GST compensation was decided to pay out of Compensation Cess every two months by the Centre.
• Now, the pandemic impact has resulted in low Cess collection that has constrained Compensation to states.
• With expected revenue shortfall of Rs 3 lakh crore, the collections through the compensation cess stand at Rs 65,000 crore.
• Now, out of the shortfall of Rs 2.35 lakh crore the state governments are being compensated only for losses arising on account of implementation issues that is Rs 1.1 lakh crore.
• The states were asked to forgo the remaining loss in GST revenues (1.34 lakh crore) as it has  arised out of an “act of god”.

Why Centre has to borrow not the states?

• The Centre’s borrowing attracts a lower interest rate as compared to that of states.
• Also, the loans to the states will be at a uniform rate that will help them to avoid interest rate differentials across states.
• This mechanism is more preferable and convenient rather than all the states rushing to the bond market.

What are the unresolved issues?

• Increased debt: The mode of the transaction has not yet clearly defined. Irrespective of the mode of transaction, centre’s borrowing will lead to a rise in general government debt.
• Centres reluctance to borrow entire amount: The repayment of the loan is not an obligation of the Centre, and will be met from proceeds from future compensation cess collections still centre is reluctant to borrow the entire expected shortfall of Rs 2.35 lakh crore

The Centre’s decision to borrow Rs 1.1 lakh crore is in the spirit of cooperative federalism. Given the huge distress in the economy even the states should show some flexibility, in the spirit of cooperation. The GST Council should approach the issue of compensating states for their remaining losses in a conciliatory manner.

Source- The Hindu

Syllabus- GS 3- Role of external state and non-state actors in creating challenges to internal security.

Context– The Vodafone Group has won one of the most high-stakes legal battles involving a foreign investor and the Indian state under international law. The retrospective taxation was in violation of the BIT and the United Commission on International Trade Law (UNCITRAL).

What is the case

1. In May 2007, Vodafone bought a 67% stake in Hutchison Whampoa for $11 billion.
2. In September that year, Indian government raised a demand of Rs 7,990 crore in capital gains and withholding tax from Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison
3. In 2012, the Supreme Court ruled in favour of the Vodafone group.
4. Later, the same year, the then Finance Minister, the late Pranab Mukherjee, circumvented the Supreme Court’s ruling by proposing an amendment to the Finance Act, thereby giving the Income Tax Department the power to retrospectively tax such deals.
5. Vodafone then initiated arbitration in 2014 invoking the Bilateral Investment Treaty signed between India and the Netherlands in 1995.
6. Ruling: It ruled in favour of Vodafone as the taxation was in violation of the BIT.

• The tribunal said that now since it had been established that India had breached the terms of the agreement, it must now stop efforts to recover the said taxes from Vodafone.
• It also directed India to pay £4.3 million ($5.47 million) to the company as compensation for its legal costs.

What is retrospective taxation?

Retrospective taxation allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.

• Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
• Apart from India, many countries including the USA, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies.

What are the key lessons from Vodafone case?

1. Compensation cost- The tribunal has ordered India to reimburse legal costs to the tune of more than ₹40 crore incurred by Vodafone in fighting this case.

• The taxpayer’s money will be used to pay Vodafone
• Key lesson is that three organs of the Indian state — Parliament, executive, and the judiciary — need to internalize India’s BIT and other international law obligations. These organs need to ensure that they exercise their public powers in a manner consistent with international law, or else their actions could prove costly to the nation.

What option does government has to solve the issue?

1. Challenge the ruling– government might challenge the award at the seat of arbitration or resist the enforceability of this award in Indian courts alleging that it violates public policy.

• The government would be ill-advised to go down this road because it would mean that India does not honour its international law obligation.
• It would send a wrong signal to foreign investors reaffirming the sentiment that doing business in India is indeed excruciating.

2. India is entangled in more than a dozen such cases against companies over retrospective tax claims and cancellation of contracts. The exchequer could end up paying billions of dollars in damages if it loses.

Way forward

Government should immediately comply with the decision to support foreign investment. The decision shows the significance of the ISDS (Investor-state dispute settlement). Regime to hold states accountable under international law when in case of undue expansion of state power. The case is a reminder that the ISDS regime, notwithstanding its weaknesses, can play an important role in fostering international rule of law.

Source- The Hindu

Syllabus- GS 3- Government Budgeting.

Context- The onus would be on Centre to resolve this impasse with regard to compensation cess of GST reforms.

What is GST compensation?

• The Centre is obliged to pay to the States, for a period of five years, compensation for revenue shortfalls in return for their having ceded the power to levy the multiple taxes that were subsumed into the GST.
• The compensation is calculated based on the difference between the states current GST revenue and the protected revenue after estimating an annualized 14% growth rate from the base year of 2015-16.

What is current GST compensation situation?

1. Pending payment– GST compensation payments to states have been pending since April, with the pending amount for April-July estimated at Rs 1.5 lakh crore.
2. GST revenue gap– The GST compensation requirement is estimated to be around Rs 3 lakh crore this year, while the cess collection is expected to be around Rs 65,000 crore – an estimated compensation shortfall of Rs 2.35 lakh crore.

What were the Options given by the Center to the States?

Options made by the Centre-

Option 1 –

• To provide a special borrowing window to states, in consultation with the RBI, to provide Rs 97,000 crore at a “reasonable” interest rate and this money can then be repaid after 5 years by extending cess collection.
• A 0.5 percent relaxation in the borrowing limit under the Fiscal Responsibility and Budget Management [FRBM] Act would be provided.

Option 2–

• To meet the entire GST compensation gap of Rs 2.35 lakh crore this year itself after consulting with the RBI.
• No Fiscal Responsibility and Budget Management Act relaxation has been mentioned for this option.

Issues raised by the States-

1. Several Sates have rejected both options and some, including Tamil Nadu- have urged the Centre to rethink in view of their essential and urgent spending needs to curb the pandemic and spur growth.
2. Enforcing a cut in compensation and bringing in a distinction between GST and Covid-related revenue loss is unconstitutional.
3. The two options offered to the States would impose huge debts on the states and as a result many would not even be able to pay salaries.
4. States simply do not have the headroom to borrow money to make up for the GST shortfall as every single State has reached its FRBM [Fiscal Responsibility and Budget Management] limit.

What are the expected reasons for Revenue shortfall for the fiscal year 2020-21?

1. Corporate tax collection loss – Companies in sectors such as airlines, hotels and consumer durables will show losses and therefore, pay less tax.
2. Less income tax collection– Large numbers of workers have lost employment and/or have faced salary cuts. Many private firms are also likely to incur losses. So, income tax collection will also be short by much more than 20%.
3. Less import – The Integrated Goods and Services Tax (IGST) and customs duties will also decline with fall in import.
4. The production of luxury and sin goods has been severely impactedand they pay the high rate of tax — 18%, 28% and cess on top.
5. The direct tax/GDP per cent may be expected to fall from 5.5% last year to less than 4% this fiscal.

Way forward

Center needs to renege on its promise to find ways to compensate the state for loss of revenue. Only the Centre is in a position to do such massive borrowing as Reserve Bank has itself said that for the Central government to borrow would be both easier and simpler. Central government would pay 2% less interest than the states.

Source: Indian Express

Syllabus: GS3: issues relating to Planning, Mobilization of Resources

Context: In the wake of pandemic and slowdown in the economy, tax system needs efficiency in case selection and consistency in assessment.

Need of efficient tax system:

• To improve tax collection:An economic contraction this year will deal a severe blow to tax collections.
• Rising uncertainty and reducing ability to pay:  With a shrinking tax base, any calibration of rates or the tax base is difficult since a hurried approach can have wider consequences.
• Limited policy space: the only tool available to the government to maintain its tax base is to urge voluntary compliance.
• To increase compliance: compliance is achieved through a fine balance between enforcement and encouragement. Compliance is also a function of the perception of the administration.
• Enforcement-driven measures are less effective: the taxpaying population has remained at a fraction (6 per cent) of the total population even after strict enforcement driven measures.
• To encourage people: complexity can discourage individuals from filing returns. For instance, complexity is reflected simply in the difference between the number of taxpayers and the returns filed — the former exceeds that latter by around 20 million.
• To Build trust between the administration and the taxpayer:the government has announced measures to usher in transparency in the system. This includes a taxpayer’s charter and faceless assessments.

• India’s new charter includes:
  • Confidentiality, right to representation and fair treatment which are in line with global practices.
  • India’s citizen charter also specifies timelines for completion of different administrative processes.
• India’s charter conveys a commitment to reducing compliance costs in administering tax legislation, holding its authorities accountable and publishing a periodic report of service standards.
• To end personal interface, e-assessment was introduced in 2019, wherein a taxpayer could digitally respond to any query related to their return.
• Faceless assessment: It seeks to automate the case selection and the distribution function of the assessing officer — assessment, scrutiny and drafting order — among various units located outside the jurisdiction of the taxpayer which will reduce corruption and delays.
  • This does not apply to search and seizure cases, and cases related to tax evasion and international taxation.

Concerns:

• Poor Dispute resolution leading to poor success rate:There is evidence of inconsistent and delayed decisions often culminating in the poor success rate of the tax department at various levels of dispute.
• Tax returns can be voluminous and the information contained therein can be unique. Therefore, taxpayers must ideally have an opportunity to explain their case in person.

Way forward:

• It is critical that the details of tax charter are spelt out concerning how these may be implemented in practice. There is urgent need of swift coordination for the implementation of the tax Charter.
• A tax ombudsman is needed to ensure that some of these standards are met.
• Fair and impartial system and a time-bound resolution of matters: the new processes, with reviews and anonymity, must ensure efficiency in case selection and consistency in assessment.

Source- The Hindu

Syllabus- GS 3- Government Budgeting

Context- Differences of opinion have emerged between Centre and states at the 41^st Goods and Service Tax [GST] Council meeting over compensation deficit.

• GST- Goods and Services Tax, is an indirect tax which has replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc. GST is a single domestic indirect tax law for the entire country.

GST [Compensation to States] Act, 2017

• States are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years (2017-22).
• The compensation assures an annualized 14% growth rate from the base year of 2015-16.
• States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty, were subsumed under GST.

Distinction in shortfall

1. Pending payment– GST compensation payments to states have been pending since April, with the pending amount for April-July estimated at Rs 1.5 lakh crore.
2. GST revenue gap – The GST compensation requirement is estimated to be around Rs 3 lakh crore this year, while the cess collection is expected to be around Rs 65,000 crore – an estimated compensation shortfall of Rs 2.35 lakh crore.

Options made by the Centre

Option 1 –

• Special borrowing window – To provide a special borrowing window to states, in consultation with the RBI, which has to be repaid by the states after 5 years.
• A 0.5 percent relaxation in the borrowing limit under the Fiscal Responsibility and Budget Management [FRBM] Act would be provided.

Option 2–

• Meeting the GST compensation gap of this year.
• No Fiscal Responsibility and Budget Management Act relaxation has been mentioned for this option.

Challenges for central government

1. Options rejected– Several States have rejected both options. Some states like Tamil Nadu, have urged the Centre to rethink in view of their essential and urgent spending needs to curb the pandemic and spur growth.
2. Compensation cess levied on demerit goods will stay on beyond 2022. This may hurt few sectors such as auto sector.

Way forward

Centre need to resolve this impasse in a way that future GST reforms do not fall victim to the trust deficit engendered by this standoff, the pandemic response is strengthened and all-round government capital spending to bolster sagging demand not derailed.

Source– The Hindu

Context– A Grand Bargain 2.0 between the center and the states is needed in longer run to tackle the issues related to GST compensation to the States.

Value added tax [VAT] – An indirect value added tax which was introduced into Indian taxation system on April 1, 2005. VAT was introduced to make India a single integrated market. On June 2, 2014, VAT was implemented in all states and union territories of India, except Andaman and Nicobar Islands and Lakshadweep Islands.

Disadvantages of VAT

1. Cascading effect of taxes – Cascading effect is when there is tax on tax levied on a product at every step of the sale. The tax is levied on a value which includes tax paid by the previous buyer, thus, making the end consumer pay “tax on already paid tax.”
2. It was not possible to claim Input Tax Credit (ITC) on service under VAT.
3. Different VAT rates and laws in different states.

The need for one country one tax was envisaged by GST which is a single comprehensive destination-based tax.

GST [Compensation to States] Act, 2017

• States are guaranteed the compensation for loss of revenue on account of implementation of GST for a transition period of five years (2017-22).
• The compensation is calculated based on the difference between the states’ current GST revenue and the protected revenue after estimating an annualized 14% growth rate from the base year of 2015-16.

Issues raised by States in current GST model

1. Limited option for States to raise money -States does not have recourse to multiple options that the Centre has, such as issue of a sovereign bond in dollars or rupees.
2. Rate of market borrowing -Centre can anyway command much lower rates of borrowing from the markets as compared to the States.
3. Rate of public sector borrowing-In terms of aggregate public sector borrowing, it does not matter for the debt markets, or the rating agencies, whether it is the States or the Centre that is increasing their indebtedness.
4. Fiscal Stimulus– Fighting this recession through increased fiscal stimulus is basically the job of macroeconomic stabilization, which is the Centre’s domain thus states can’t overcome the impact of fall in revenue which is more or less lockdown induced.
5. Trust issue -Breaking this important promise, using the alibi of the COVID-19 pandemic causes a serious dent in the trust built up between the Centre and States.

Possible solutions

1. Low GST rate -A low moderate single rate of 12% encourages better compliance, reduces the need to do arbitrary classification and discretion, reduces litigation and will lead to buoyancy in collection.

Example- Australia, for the past two decades their GST rate has been constant at 10%.

2. Importance of 3^rd tier government -Of the 12% GST, 2% must be earmarked exclusively for the urban and rural local bodies, which ensures some basic revenue autonomy to them. The actual distribution across panchayats, districts and cities would be given by respective State Finance Commissions.
3. Low transaction cost – The current system is too complex and burdensome. An overhaul of the interstate GST and the administration of the e-way bill to reduce the transection cost and also need to zero rate exports.

Way forward

GST is a crucial and long-term structural reform which can address the fiscal needs of the future, strike the right and desired balance to achieve co-operative federalism and also lead to enhanced economic growth. The current design and implementation has failed to deliver on that promise. A new grand bargain is needed.

Synopsis: The recent January 2021 retail inflation data provides relief to monetary authorities. Consumer Price Index (CPI) stood at 4.06% which is a desired outcome for ensuring macroeconomic stability. 

Background:

• The inflation had remained above the RBI’s threshold mark of 6% for six months till November. The ideal range of CPI is 2-6%.
• In January 2021, inflation reached a 16-month low.
• The fall in the inflation rate was particularly attributed to a modest rise of 1.89% in Consumer Food Price Index. This was majorly a result of 15.48% drop in vegetable prices and easing of cereal prices.

RBI’s view over inflation:

• As per RBI, bumper Kharif crops, good vegetable supply in winters, and better prospects of rabi produce could reduce inflation in future months.
• Further, rising fears of avian flu will decrease poultry demand and control inflation.
• However, RBI is cautious of higher inflation in pulses and edible oils. A 13.4% price rise was seen in pulses and products. Further, the rise in the oils and fats category was 19.7%.

Future concerns which may cause inflation to rise:

• First, inflation for eggs and meat was in double digits despite the avian flu threat.
• Second, the favorable base effect is about to decrease. It is causing fear of rising inflation in the future. The base effect is the fluctuation in a monthly inflation figure due to law or high base i.e. level of inflation in the same month a year-ago.
• Third, the producers in multiple sectors (automobile, real estate, etc.) are expected to transfer the cost of inputs to consumers. This is due to rising input costs as shown by IHS Markit India Manufacturing Purchasing Managers’ Index (PMI).
• Fourth, the rising fuel prices could also contribute to increasing inflation. Diesel has already crossed the 80 rupees mark which has pushed prices of numerous goods.

In the current scenario, banks are given necessary support which has enhanced their liquidity. This calls for due vigilance by policymakers, else inflation can’t be moderated thereby impacting macroeconomic stability.

Synopsis: Retail prices of petrol and diesel have reached record highs in India. One major reason is a heavy tax on Petrol and diesel in India.

Introduction 

The price of petrol is touching Rs 89 per litre in Delhi and diesel reaching Rs 86.30 per litre in Mumbai. The government states that the reason behind this rise in price is an increase in global crude prices by more than 50 per cent. 

While retail prices of both fuels in other countries are just reaching pre-pandemic levels, Indian consumers are paying a lot more.

Why are consumers in India paying more for petrol and diesel?

Retail petrol and diesel prices are linked to global crude oil prices in theory. That means if crude prices fall, retails prices should come down too, and vice versa. However, this does not happen in reality especially in India.

1. First, when global prices go up, the consumer has to pay the increase in price. But when the prices decrease, the government introduces fresh taxes to ensure that it collects extra revenues. 
   • For instance, the government hiked the central excise duty on petrol and diesel at the beginning of 2020 to boost revenues. The government did this to boost economic activity government. This resulted in the revenue gain to the government. 
   • Currently, state and central taxes amount to around 180 per cent of the base price of petrol and 141 per cent of the base price of diesel in Delhi. 
2. Second, crude oil prices collapsed during the pandemic. But as economies have reduced travel restrictions, global demand has improved, and prices have been recovering.
3. Third, the controlled production of crude amid rising demand has been another key factor in boosting oil prices.
4. Fourth, Oil Marketing Companies (OMCs) are free to set prices for petrol and diesel based on international prices on paper. Increase in central levies has meant that the consumer hasn’t benefited from low international prices and has ended up bearing the cost of rising crude oil prices.

Read How India should end oil age?

Conclusion 

• Experts suggest that the impact of rising fuel inflation has been balanced by declining food inflation. However, the consumers with greater expenditure on travel are bearing the higher prices even though the overall inflation reduced down to 4.06 per cent in January.

Synopsis: RBI need to exit out of its expansionary policy and manage ‘the impossible trinity’, i.e. Capital inflow, inflation and exchange rate.

Source: The Hindu   

Introduction 

• • RBI adopted the extraordinary expansionary policy after Covid-19.  

• • It reduced policy interest rates aggressively to increase the liquidity in the market. It also provided targeted assistance to especially distressed sectors. 
  • But, now RBI should consider an exit plan out of expansionary policy to avoid any loss in the macroeconomic terms. 
  • In this process RBI might face the challenge of managing ‘the impossible trinity’, i.e.  Keeping doors open for capital flows while simultaneously maintaining a stable exchange rate and restraining inflation. 

What are the challenges in managing ‘the impossible trinity’? 

Firstly, RBI need might face a dilemma of managing Inflation and support to economic recovery.  

• • Inflation is above the RBI’s target band for the past several months and is expected to remain above target for the next several months.  
  • Whereas, MPC is not able to decide against the expansionary monetary policy, out of concerns for growth and financial stability.  
  • MPC expects inflation to soften by itself due to bumper winter crop and normalisation of supply chain post-lockdown.  

Second, RBI needs to think about the savers, offered low-interest rates at a time of high inflation. Thus, the value of their saving is getting reduced.  

Third, RBI require to withdraw the ‘excess’ liquidity from the market.  

• • Banks are routinely depositing trillions of rupees with the RBI is evidence that the liquidity increase by RBI is not giving the intended results.   
  • Mispricing of risk of too much liquidity for too long can lead to the financial crisis.  

Fourth, RBI might face the challenge of ‘taper tantrums’ at the later stage, which triggers the panic sell-off by the investors in the market.  

• • Taper tantrum: In May 2013, U.S. Federal Reserve Chairmen announced that they were considering gradually tapering/reducing ‘quantitative easing’.  
  • Although the announcement should have been taken as signs of a robust recovery in the economy, instead panic sell-off started in the financial market.  

• Thus, RBI also need to frame their communication strategy in a way that it doesn’t trigger the panic sell-off.  

Fifth, RBI will have to stop the rupee from appreciating, in the face of policy change.  

• • Current Account Surplus this year together with massive capital flows has caused increase in flow of dollar in the system.  
  • It is putting the upward pressure on the Rupee, which is already overvalued in the real terms.  
  • RBI has already absorbed this year, nearly $90 billion to prevent exchange rate appreciation and to maintain the competitiveness of the rupee.  

• • Thus, RBI’s ability to keep the Rupee value in control will be constrained by increasing inflation.  

In the upcoming days, managing the impossible trinity will be a tricky challenge for RBI given the condition of the economy after COVID-19.

Read Also :upsc previous year question paper

Context- Retail inflation showed signs of easing in November, led by easing prices of some food items.

More in news-

Consumer Price Index inflation stood at 6.93% in November 2020 compared to 7.61% in October, according to data released by the Ministry of Statistics and Program Implementation, though it remained above the comfort level of the Reserve Bank.

What are the reasons for decline in CPI inflation?

1. The movement in retail inflation is broadly driven by the movement in food and beverage inflation which has 46 per cent weight in the consumer price index.

• Within the food items, the inflation declined for vegetables to 15.63%, cereals and products 2.32%, meat and fish 16.67% and milk and products 4.98%.

2. Inflation in the key transport and communication category that includes petrol and diesel eased by a marginal 10 basis points to 11.06%.
3. The inflation for housing eased to 3.19%, while that for miscellaneous items was flat at 6.94% in November 2020.

• Within the miscellaneous items, personal care and effects 11.97%, recreation and amusement 4.57%.

What are the areas of concern for RBI?

1. Inflation remained above the comfort level of the RBI-

• Out of the food basket of 12 items, inflation still remained in the double digits in the case of six.
• Key protein sources including pulses, eggs and meat and fish continued to register worryingly high levels of inflation.

2. Worrying high transportation cost– With oil marketing companies continuing to raise pump prices of these crucial transportation fuels, it is hard to foresee any further appreciable softening in food prices in December.

• This put the RBI’s forecast for average fiscal third-quarter inflation of 6.8% in jeopardy.

Disrupted supply chain logistics, higher operational and labour costs, higher administrative fuel costs partly contribute to the upward inflation trajectory in recent months.

What is the way forward?

• Policymakers must guard against easing vigilance on prices while considering growth-supportive measures.
• Price stability must remain the monetary authority’s primary target.
• The decline in the CPI inflation print in Nov 2020 to 6.93 per cent from 7.61 per cent in Oct 2020 has definitely come as a relief to the bond markets.

Source: Click here

News: Reserve Bank of India(RBI) has allowed regional rural banks (RRBs) to access the liquidity adjustment facility(LAF), marginal standing facility(MSF) and call or notice money markets with the aim to facilitate better liquidity management for these lenders.

Facts:

• Liquidity Adjustment Facility(LAF): It is a facility extended by the Reserve Bank of India to the banks to avail liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an overnight basis against the collateral of Government securities including State Government securities.
• Marginal standing facility(MSF): It is a window for banks to borrow from the Reserve Bank of India in an emergency situation when interbank liquidity dries up completely.MSF rate is generally higher than Repo rate.
• Call or Notice Market: The call/notice money market forms an important segment of the Indian Money Market.Under call money market, funds are transacted on an overnight basis and under notice money market funds are transacted for a period between 2 days and 14 days.

Additional Facts:

• Regional Rural Banks: These are financial institutions which ensure adequate credit for agriculture and other rural sectors.They were set up on the basis of the recommendations of the Narasimham Working Group (1975), and after the legislation of the Regional Rural Banks Act, 1976.
• First RRB: The first Regional Rural Bank “Prathama Grameen Bank” was set up on 2nd October, 1975.
• Stakeholders: The equity of a regional rural bank is held by the Central Government, concerned State Government and the Sponsor Bank in the proportion of 50:15:35.
• PSL: The RRBs are required to provide 75% of their total credit as priority sector lending(PSL).

Context- RBI in its 6th bi-monthly MPC meeting voted unanimously to maintain status quo on benchmark interest rates to support the economy.

What were the key highlights of latest MPC meeting?

The Monetary Policy Committee (MPC) recently left benchmark interest rates unchanged and maintained an ‘accommodative’ policy stance as it prioritized support for the economy’s recovery over ‘sticky’ inflation amid the COVID-19 pandemic.

• The RBI keeping rates low despite high inflation shows its focus to boost economic growth over keeping inflation under check which is majorly a supply-side issue.

Key highlights-

• Decision – The MPC kept the RBI’s key lending rate, the repo rate, steady at 4%.
• MPC panel projected that the real GDP contraction will contract at 7.5% [-7.5%] for the financial year ending. It is an upgrade in comparison to -9.5% in October MPC review.
• Citing the improvement in activity in the second quarter, it projected GDP would return to growth of 0.1% in Q3, and expand 0.7% in Q4.
• The RBI also announced a raft of liquidity management measures and steps to improve regulatory oversight of the financial system.
• MPC expects inflation to rise in the near term.

What are the key challenges?

• Cost push pressure– The increase in the prices of iron ore, steel and transportation fuels also add to the worries that cost pressures are continuing to accumulate.
• Food inflation surges to double in October 2020 across protein-rich items including pulses, edible oils, vegetables and spices on multiple supply shocks.
• Booming financial markets and rising asset prices because of surplus liquidity will also contribute to upside risks.

Way forward-

• MPC’s policy approach is clearly fraught with risks. A small window is available for proactive supply management strategies to break the inflation spiral being fuelled by supply chain disruptions, excessive margins and indirect taxes
• The RBI policy is supportive of growth and in sync with the government’s reform agenda.

Source: Click here

News: Reserve Bank of India’s(RBI) Monetary Policy Committee(MPC) has announced its bi-monthly monetary policy review for the month of December.

Facts:

Key Takeaways:

• Repo Rate: It is the rate at which the RBI lends money to the banks for a short term.It remains unchanged at 4%.
• Reverse Repo Rate: It is the short term borrowing rate at which RBI borrows money from banks.It remains unchanged at 3.35%
• Marginal Standing facility: It is a window for banks to borrow from the Reserve Bank of India in an emergency situation when interbank liquidity dries up completely.It has remained unchanged at 4.25%.
• Inflation: Inflation has remained consistently above the upper end of RBI’s mandated 2-6% target range every month barring March,2020.
• Growth Projection: RBI has revised its GDP growth expectation for 2020-21 to -7.5% from -9.5% which signals improvement.
• Accommodative Stance: RBI has maintained an accommodative stance implying more rate cuts in the future if need arises to support the economy hit by the COVID-19 pandemic while ensuring inflation remains within the target.
• Tighter Norms for UCBs and NBFCs: RBI has announced the introduction of risk-based internal audit norms for large urban cooperative banks(UCBs) and non-banking financial companies (NBFCs) as part of measures aimed at improving governance and assurance functions at supervised entities.
  Read Also : Government Schemes for upsc

Additional Facts:

• Monetary Policy Committee(MPC): It is a statutory committee of the Reserve Bank of India which consists of six members with three nominated by the Union government and three representing the RBI.It is mandated by law to ensure that retail inflation stays within a band of two percentage points of the target inflation rate of 4%.

Source: Click here

News: Reserve Bank of India(RBI) has announced the setting up of an Innovation Hub under the chairmanship of Kris Gopalakrishnan.It has also selected two entities for testing products under regulatory sandbox structure.

Facts:

• Aim: To create an ecosystem that would focus on promoting access to financial services and products and will also promote financial inclusion.
• Features:
  • The Hub will collaborate with financial sector institutions, technology industry and academic institutions and coordinate efforts for exchange of ideas and development of prototypes related to financial innovations.
  • It would also develop internal infrastructure to promote fintech research and facilitate engagement with innovators and start-ups.

Additional Facts:

• Regulatory Sandbox: It is an infrastructure that helps financial technology (FinTech) players live test their products or solutions before getting the necessary regulatory approvals for a mass launch.

What is Monetary Policy?

• Monetary policy is the process by which the RBI controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability.
• Quantitative Instruments: General or indirect (Cash Reserve Ratio, Statutory Liquidity Ratio, Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate, Marginal standing facility and Liquidity Adjustment Facility (LAF))
• Qualitative Instruments: Selective or direct (change in the margin money, direct action, moral suasion).

Recent trends: RBI a few ago released its monetary policy report (MPR)

• The repo rate (the rate at which the RBI lends short-term funds to commercial banks) stands at 4.0 percent and the reverse repo rate (the rate at which the RBI borrows) stood at 3.35 percent.
• As per RBI, transmission to bank lending rates has improved as evident from the decline in the lending rate of banks on fresh loans.
• Rise in food Inflation owing to floods in eastern India, lockdown-related disruptions and cost-push pressure, etc.
• Global financial market volatility caused by the impact of the COVID-19 is most likely to exert pressure on the Indian rupee.
• Real Gross Domestic growth will remain negative for the whole 2020-21 period.

• Informal Indian economy: The monetary policy affects only around 60% of loans/credit in the Indian economy which are sourced from formal channels (Banks and NBFCs).Challenges to Monetary policy functions of RBI:
• Supply chain disruptions: The MPC uses CPI inflation to adjusts its policy rates. However, the CPI doesn’t factor the rise in inflation driven by supply-chain dislocations. For example, restriction on movement resulted into a shortage of essentials.
• Weak policy transmission: Both the government and the RBI are concerned that the cumulative easing has not yet been reflected in the lowering of their lending rates by banks.
• Limitation of Inflation targeting: Inflation has been accompanied by declining borrowing in the formal sector likely affecting investment leading to rise in unemployment (according to NSSO, unemployment in India has been highest in the last 45 years).
• Triangular balance-sheet: In the aftermath of the IL&FS default in 2018, an additional dimension of liquidity and solvency of the NBFC sector has been added to the prevailing twin balance-sheet problem. Borrowing easy money cannot solve governance issues.
• Gold economy: The Indian household saves in gold/jewelry rather than financial instruments. This curtails RBI from effectively circulating money in the economy.

Is Inflation targeting a good policy?

Inflation targeting:

• It is a monetary policy strategy used by central banks to maintain inflation within a specific range.
• Narasimham (2000) and Rajan (2007) Committees recommended the implementation of inflation targeting in India.

Inflation targeting as a good policy

• It increases the transparency and credibility of the central bank consequently allowing it to carry out its monetary policy more effectively.
• It helps to stabilize inflationary expectations in an uncertain future.
• Increases the focus on domestic considerations and enables quick response to domestic economy shocks.

Limitations of Inflation targeting policy

• The policy doesn’t address the sudden shocks in the economy and inefficient transmission mechanisms.
• Too much weight to inflation stabilization might prove detrimental to the stability of real economy and other growth objectives.
• Requirement of Number of preconditions like well-developed technical infrastructure for forecasting, modelling and data availability etc.
• India lacks suitable conditions for successful implementation of inflation targeting. For example, lack of adequately developed financial markets, confidence of global capital markets is low, independence of the RBI etc.
• Policy of inflation targeting will lead to highly unstable and inappropriate exchange rate.

Need for independent MPC:

• To form credible governance policy: RBI should be independent to decide on the precise corrective action for banks with high NPAs, the desirable state of liquidity and the prudential norms to be observed by banks.
• To ensure low and stable inflation: For instance, Governments use pro populist policy before elections to provide a short-term boost to growth. This often leads to long-term inflation.
• Sustain Credit availability: To ensure adequate flow of money and credit to required areas.
• To prevent sudden appreciation and depreciation of currency. For example, In Turkey lira had depreciated over 80% against the dollar in the 12 months due to government interference.
• Sustainable Investments: Independent MPC will boost the investors’ confidence and will enhance credit ratings there by attracting more investments.
• To avert crisis: Mismanagement between fiscal and monetary policy led to increased Sovereign debt in developing economies. For Example, Greek Crisis.

Way forward:

• Develop a legal process to ascertain RBI’s responsibilities and accountability.
• Ensuring RBI’s autonomy: The governor should be made responsible and accountable to Parliament. The RBI act should be amended to provide a guaranteed tenure of the governor and deputy governors for their effective functioning.
• Change in policy: There is need to look at an indicator of inflation that excludes food and fuel and include structural factors responsible for price rise.
• Cooperation between Government and RBI: There should be mutual cooperation and coordination between RBI and Government in large at public interests for an efficient and sustainable economy.

Context– RBI has to answer to Parliament why it misses the inflation target and what plans do they have to control inflation.

What is Inflation targeting and what happen when RBI fails to meet inflation target?

1. Inflation targeting involves using monetary policy to keep inflation close to the agreed target. RBI and Government of India signed a Monetary Policy Framework Agreement in February 2015.

• • As per terms of the agreement, the objective of monetary policy framework would be primarily to maintain price stability (inflation targeting), while keeping in mind the objective of growth.
  • Target given to MPC:The Reserve Bank of India’s (RBI) MPC was given the target of keeping inflation at 4% +/- 2%. This meant that inflation should be between 2% and 6%.

2. Condition for failure of inflation target – A breach of the tolerance level for three consecutive quarters will constitute a failure of monetary policy.

• • In such case– RBI have to send a report to the central government stating reasons and the remedial actions it proposes to initiate, and an estimate of the time-period within which it expects to achieve the inflation target through the corrective steps proposed.
  • Aim– To enhance transparency and accountability of the central bank.

What was the reason proposed by RBI for the breach of inflation target?

• • Lack of Data due to lockdown– The MPC is of the view that there was a break in the consumer price index (CPI) series since inflation data for April and May was imputed and not collected by visiting the markets by NSO surveyors. It was rather estimated by the NSO.

However, Prices could be collected from the urban markets and villages after lockdown restriction were lifted and non-essential activities partially restored.

Way forward-

• The central bank needs to answer three questions — why it has failed to achieve its target; what remedial measures it would take to bring inflation back within the target range; and by what time.
• Transparency can enable more informed decision-making within the government, greater public scrutiny of the RBI’s performance, and an improved inflation-targeting regime.

The Labour and Employment Ministry on Thursday revised the base year of the Consumer Price Index for Industrial Workers (CPI-IW) from 2001 to 2016.

Why the base year for the Consumer Price Index for Industrial Workers(CPI-IW) has been changed?

Due to the changing consumption pattern, more weightage has been given to spending on health, education, recreation and other miscellaneous expenses while the weight of food and beverages has been reduced.

Consumer Price Index (CPI) for Industrial Workers

It measures changes in the price level of a market basket of consumer goods and services purchased by households.

CPI data is released monthly by the Central Statistics Office (CSO) which functions under the Ministry of Statistics and Programme Implementation.

There are four types of CPI: a) CPI-IW (Industrial Worker), b) CPI-UNME (Urban Non-Manual Employees), c) CPI-AL (Agricultural Labourers) and d) CPI-RL (Rural Labourers)

RBI has adopted CPI as the key measure for determining the inflation situation of the Indian economy on the recommendation of the Urjit Patel Committee.

Usage of CPI-IW

CPI-IW  is used:

• To regulate the dearness allowance (DA) of government staff and industrial workers.
• Apart from measuring inflation in retail prices.
• To revise minimum wages in scheduled employments.

After this Index, the government is expected to announce a new series of the CPI for agriculture workers, which is currently using the base year of 1986-87.

Need for Base years 

Base years are required to facilitate inter-year comparisons of various data.  if an index is using 2011-12 as the base year, data of all future years will be calculated based on the data of the index in 2011-12, for the purpose of comparison.

Example: Let’s say the cost of a basket of goods in an index was Rs 6 lakh in the base year (2016), and has been set to an index value of 100. If in 2017,  the basket cost has been increased to Rs 6.6 lakh, the index equivalent would be 110.

The inflation rate will be computed by comparing 110 which is today’s value to the base value which is 100, resulting in a 10% increase.

Base years are used to nullify the impact of inflation on the data and project the actual estimates.

Thus, for selecting a year as the base year, certain requirements should be fulfilled, such as:

• The year must be a normal year and not have experienced any abnormal incidents such as earthquakes, droughts, floods,  etc.
• No abnormal economic activity like Hyper rise in price should have taken place.
• Base year should not be very far from the current year.

Source – Live Mint

Syllabus- GS-3 Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context- Inflation targeting and the decisions of  Monetary Policy Committee (MPC).

What causes inflation?

The primary cause of inflation is the mismatch between demand and supply. The mismatch can be in following context-

1. Excess money supply that raises aggregate demand
2. Supply deficiency (A shortfall in the production of a commodity fails to meet even the basic needs of the citizens and thus prices raise causing inflation).

What is the new monetary framework?

The agreement between the Reserve Bank of India (RBI) and the central government signed in February 2015. The agreement explicitly made inflation targeting the objective of the MPC while using the repo rate as the instrument for it.

• Rate steady– The Reserve Bank’s MPC was given the target of keeping inflation at 4% with a tolerance limit of 2%. This meant that inflation should be between 2% and 6%.
• Contrasting target – The target was in contrast with the multiple indicator approach that predated this framework where the central bank focused on both growth and price stability.

Thus, RBI was finally free to do its core job as guardian of the rupee’s value and granting currency the stability needed to serve as a credible unit for long-range forecasts.

What is inflation targeting? What are the views of critics?

Inflation targeting refers to keeping inflation rate within the permissible band so that business houses can plan their investment activities.

Procedure-

1. Review meeting– (every two months): Where MPC discuss the likely inflation and growth estimates over the coming months.
2. Targeting inflation: Based on this review, the MPC targets inflation using the policy rate, or the repo rate.

Critics’ view-

• Inflation targeting was ill-suited to an emerging economy like India.
• Flexible regime with a wide inflation band was far too rigid to foster growth.

Inflation in India has been subdued since the new monetary policy framework was brought in. Many view this as a sign of its success in India while others point at the tight policy and its adverse impact on India’s growth rate as a sign of problems with the framework, which has come at the cost of growth.

Way forward

Centre must not act in haste to abandon inflation targeting. Price stability is a goal too worthy to give up on. For the sake of fairness, if not the rupee, government should resist the temptation to use the “money illusion” of inflation for short-term ends.

Source: Indian Express

Gs3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context: Recently the monetary policy committee (MPC) concluded that elevated inflation has constrained it from easing policy rates.

Why there is demand to rework inflation targeting regime?

• Economy slowdown:Since the growth rate is falling that is why question have been raised regarding the inflation targeting framework.
• Growth-inflation quagmire:there is demand for the government to relax the inflation targeting framework to spur growth and demand.

Suggestions:

• Greater tolerance for higher levels of inflation either by adjusting the acceptable range of inflation upwards, or by extending the period over which the MPC has to meet its inflation target.
• Shift from headline to core-inflation as the nominal anchor of monetary policy.
• Incorporate other indicators such as nominal GDP explicitly into the framework.
• Doing away with the inflation targeting framework altogether.

What are possible way outs and their implications?

Easing policy rate:

• It will inject a degree of uncertainty and unpredictability in monetary policy.
• Frequent revisions will destabilise household expectations.
• It will signal a lack of commitment to maintaining price stability.

Shift to a multiple indicator structure:

• This move harks back to the pre-MPC days when there was far greater uncertainty over monetary policy.
• No clarity over the indicator that was dictating the stance of the RBI governor.
• Absence of a well-defined anchor will reduce transparency and accountability from the central bank.

Central bank financing the Centre’s capital expenditure on a regular basis.

• Monetisation should be the last resort: The perils of falling back on this long-discarded policy need to be guarded against.
• Tilt the balance of power in favour of the government: Government owing to its short-term political imperatives will be seduced by the apparent simplicity of this idea without considering its long-term repercussions.
• Channel funds to revenue expenditure:It will lead to a situation wherein the entire budgeted capital expenditure is financed by the central bank.
• Blur the line between fiscal and monetary policy :Giving a central bank a degree of control over the government’s expenditure priorities will allow unelected technocrats to be in charge of determining the expenditure priorities of the government. It will result in the fiscalisation of monetary policy.

Pledge Government shares in companies to avail loans against them:

• It raises questions whether a sovereign should pledge assets to borrow in the local currency.
• In 1991, India had pledged gold for a foreign currency denominated loan not a local currency loan.
• There is not clarity on what will happen if the value of the shares pledged falls below that of the loan.

What is the way forward?

• There is need topush for more external voices in the MPC. For instance, In the UK, a non-voting treasury representative sits with the MPC to discuss policy issues.
• During periods of extreme uncertainty, there is need to adopt some unconventional measures but the principles of sound public policyshould not be discarded.

Source – The Indian Express

Syllabus – GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development, and employment.

Synopsis – Revised estimates of GDP are released. It would impact the growth prediction and levels of the future National Income.

Introduction

• Last week all major financial publications were released i.e. economic survey, budget, and 1st bi-monthly monetary policy review.
• However, the first revised estimate of GDP growth in 2019-20 was not highlighted.
• This revision has not only revised the 2019-20 GDP growth rate, but also the GDP growth rate for 2017-18 and 2018-19.
• Accordingly, GDP estimates for 2019-20 have been revised from 4.2% to 4 percent. For 2017-18 revision is from 7% to 6.8% and for 2018-19 it is from 6.1% to 6.5%.

What are the key takeaways from GDP revision?

• First, There have been many revisions of GDP estimates. The growth rate is still not certain. For example, for 2016-17 the GDP growth rate went up from 7.1%, as per the First Advance Estimates, to 8.3% in the final analysis.
• Second, revision in 2019-20 figures is important for the base year effect. Due to COVID-19 disruptions in 2020-21, the GDP figures of 2019-20 becomes important for the comparison. Lower estimates in 2019-20, can result in higher figures of 2020-21 and 2021-22.
• Third, India’s GDP growth rate already going downwards from 2016 i.e. following an inverted-V shape. The COVID-19 pandemic brought that to a complete halt. Thus, a “V-shaped” recovery, which is being talked about by the expert is meaningless. For an actual recovery, the gains should first surpass the level of 2019-20.

Way forward-

The pandemic did not change the growth trajectory [it was already going down], it only made the decline even more precipitous.

Source- The Indian Express

Syllabus- GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development, and employment.

Synopsis – The Economic Survey 2020-21 outlines the status of various sectors of the economy.

 Introduction-

• • The government presented Economic survey 2020-21 of India in the Parliament.
  • The Economic survey provides a summary of the annual economic development across the country during the previous financial year.
  • The focus of this year’s economic survey is on the following basic tenets:
    • Atmanirbhar Bharat in COVID times.
    • Shifting from entitlement-based approaches to an entrepreneurship-based policy framework.
    • Going beyond “nudging”.

1. Economic recovery: The emphasis is mostly on the economic recovery routes after the damage due to COVID-19 pandemic. It is expected that the recovery will follow a V-shaped path. Now, the target of making India a $5-trillion economy by 2024 is also clear.
2. Health expenditure: The survey recommends raising government spending on the healthcare sector [from the current 1 per cent to 2.5-3 per cent of GDP]. It will reduce out-of-pocket expenditures.
   • Health outcomes- The health results of the states that have adopted Pradhan Mantri Jan Arogya Yojana (PM-JAY) have improved compared to those that have not adopted the scheme.
3. Bare necessities- Access to the bare necessities such as water and sanitation, accommodation, micro-environment, and other facilities has improved across all States. The survey looks at how the bare necessities have changed.
4. National Infrastructure Pipeline (NIP) will boost inclusive economic growth and employment opportunities during 2020-25. The NIP [introduced in 2020] has estimated cumulative investment of 111 lakh crore over five years in infrastructure projects.
5. Government consumption and net exports cushioned the growth from diving further down.
   • Strong services exports and weak demand leading to a sharper contraction in imports than exports.
   • India remained a preferred investment destination in FY 2020-21 with FDI pouring.
   • India’s forex reserves at an all-time high as to cover 18 months’ worth of imports in December 2020.

However, the survey should have focused more on the external trade aspect. India should try to establish value chains with South and Southeast Asia.

India should also reconsider the high cost of tariffs when 38% of our exports rely on imports.

Synopsis- Expenditure side of National Income is showing signs of stress. The government should try to revive the consumption side to return to the growth path. 

Introduction 

• The first advance estimates of GDP growth for FY21 is more optimistic than the projections provided by many institutions, global and domestic.  
• However, the figures still have a substantial chance of uncertainty as the source of data is not reliable [Very little up-to-date primary information is available for the estimation]. 

What are the areas of concern?  

On the expenditure side, except for government final consumption expenditure, alternative drivers of demand are down sharply. Non-Public Consumption Expenditure is predicted to contract 9.5 per cent while capital formation has contracted by 14.5 per cent, with imports and exports also contracting.  

The economic performance was dented by sharp de-growth in the following three sectors- 

• A sector-wise breakup of data for FY21 shows the sharpest fall in trade, hotels, transport, communication, and broadcasting services at –21.4 per cent from 3.6 per cent growth last year.  
  • • This is followed by 12.6 per cent contraction within the construction sector as against a growth of 1.3 per cent last year. 
• Manufacturing is declining by 9.4 per cent in 2020-21 from 0.03 per cent growth last year. 

The estimated losses in these three sectors account for 93.5 percent of the total loss for the whole year. Hence, fiscal policy needs to focus on priming demand to return to the trend growth path. 

What policy interventions are needed to increase consumption? 

• First, Government should focus on enhancing credit flows to the small and marginal farmers
  • • KCC (Kisan Credit Cards) constitute 60% of Major outstanding bank credit due to COVID and Agri stress.
    • To encourage consumption among farmers, interest payment by farmers should be sufficient for their KCC loan renewal.
    • It may result in a reduction of the NPA of the banks from KCC.
• Second, the government should try to mainstream the tenant farmers
  • • There are almost 3-4 crore tenant farmers, not receiving PM-KISAN benefits.
    • The government should try to formalize the credit delivery to tenant farmers by issuing tenancy certificates on the line of Andhra Pradesh.
    • Another way is the formation of SHGs to enable formal lending.

• Third, waive tax on Senior citizen saving scheme– The government should make SCSS interest income to be tax-free. 
• Fourth, Launch Adopt-a-family scheme– The scheme is voluntary and taxpayers with income up to over Rs 10 lakh could be incentivized for supporting a BPL family for a year. The government can incentivize taxpayers with around Rs 50,000 tax deduction apart from exemption offered under-80C.  
• Fifth, take the following steps to bring more FDI and increase Ease of Doing Business rankings; 

• • • Withdraw all tax appeals. 
    • Accept all domestic arbitration decisions against government departments/agencies 
    • Clear above outstanding dues within a stipulated time. 
• Sixth, the Government should increase investment in the health and education sectors;
  • • The government can introduce a medical savings account.
    • Interest earned by the depositor can be deducted by government to provide the person with Mediclaim policy.

• Lastly, the government should bring down its stake in state-owned banks to less than 50 percent.

Way forward- 

By fulfilling these criteria, India can improve its position on the Ease of Doing Business ranking.

Synopsis –The macro-implication of K-shaped recovery and labour market pressure. How the government budget will deal with it? 

Introduction-   

• COVID Vs Economic Mobility – India has broken the link between COVID virus proliferation and mobility earlier and more successfully. 
• India’s GDP estimates for 2020-21 show that the economy is expected to perform much better than earlier projections. 
• However, the present economic recovery is very hopeful developments but, juxtaposed with a stronger-than-expected recovery, is confirmation of labour market scarring. 

What are the present economic developments in India?  

• Industrial sector - The large firms have endured the crisis better and are gaining market share at the expense of smaller firms.  

• • • Although it will increase medium-term productivity, but it will also increase the dominance/pricing power of big companies in the market.  

• Employment – CMIE’s [Centre for Monitoring Indian Economy] labour market survey reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels.  

• • • These labor market projections not incompatible with a sharper near-term rebound, as this recovery is led by capital and profits, not labour and wages 

• Household sector – Households at the top of the pyramid are seen their incomes largely protected, and savings rates forced up during the lockdown, increasing ‘fuel in the tank’ to drive future consumption. 

• • • Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes. 

What are the implications of a K-shaped recovery? 

K-shaped recovery happens when, following a recession, different sections of an economy recover at starkly different rates or magnitudes. The macro-implication of K-shape recovery in India are- 

• Firstly, issue of Income- Upper-income households have benefitted from higher savings for two quarters. Present recovery is led by these savings.  

• • • But lower-income households  are facing loss of income in the forms of jobs and wage cuts. This will be a recurring drag on demand, if the labour market does not heal faster. 

• Second, the issue of Consumption– To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-hindering because the poor have a higher marginal propensity to consume (i.e. they tend to spend (instead of saving) compared to higher marginal propensity to import among rich.  

• • • Consumption pattern– Passenger vehicle registrations (proxying upper-end consumption) have grown about 4 per cent since October while two-wheelers have contracted 15 per cent. 

• Third, increases the inequality– COVID-19 reduces competition or increases the inequality of incomes and opportunities between rich and poor. 

• • • This could affect the trend growth in developing economies by hurting productivity and tightening political economy constraints. 

 How upcoming budget may help India to deal with K Shape recovery?  

Policy needs to look beyond the next few quarters and anticipate the state of the macroeconomy post the sugar rush, for the wellbeing of poor citizens and increase its income level. 

• First, Policy will look for the private sector to start re-investing and re-hiring, and thereby sets the economy onto a more virtuous path. Barring that, the labor-market hysteresis could sustain with the manufacturing and service sectors. 

• • Private investment revival policy may be implemented first for recovery of the private sector. 

• Second, Ensure exports should benefit from increasing global growth as the world gets vaccinated steadily.  
• Third, Government may invest in large physical and social (health and education) infrastructure push. It may provide employment for who lost job due to COVID. It may reduce inequalities. 

• Fourth, a reliable medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability. 
• Lastly, the investment model for public investment must be balanced to push and financed by aggressive public asset sales.

Read Also :upsc syllabus pdf

News: The World Bank has released the Global Economic Prospects report.

Facts:

• Global Economic Prospects Report: It is a World Bank Group flagship report that examines global economic developments and prospects, with a special focus on emerging markets and developing economies. It is issued twice a year, in January and June.

Key Takeaways from the Report:

• India: It is expected to grow at 5.4% in fiscal year 2021-22 and 5.2% in fiscal 2022-23 after an expected contraction of 9.6% in fiscal 2020-21.
  • Reason: India’s expected contraction in the is due to a sharp decline in household spending and private investment. There was severe income loss in the informal sector which accounts for 4/5ths of employment
• Globally: Global economic output is projected to grow by 4% in 2021 assuming widespread roll-out of a COVID-19 vaccine throughout the year. This projection is 5% below pre-pandemic levels.
• Emerging Market and developing economies (EMDEs): They are expected to grow at an average of 4.6% in 2021-22 reflecting the above average rebound in China (forecast at 7.9% and 5.2%, this year and next).
• Increase in Global Debt Levels: There has been a massive increase in global debt levels because of the pandemic with the South Asian region seeing the steepest increase. India’s government debt expected to increase by 17% of GDP while service output contracts over 9%.
• South Asia slowdown led by India: The South Asian region’s economy is expected to contract by 6.7 % in 2020 due to the pandemic. This was led by India’s deep recession where the economy was already weakened by the stress in non-bank financial corporations.

Recommendations:

• The key immediate policy priorities for countries should be limiting the spread of the virus, providing relief for vulnerable populations and overcoming vaccine-related challenges should be the key immediate policy priorities for countries.
• Countries should also foster resilience by safeguarding health and education, prioritising investments in digital technologies and green infrastructure, improving governance, and enhancing debt transparency.

Article Source

News: According to a report by the UK-based privacy and security research firm Top10VPN, India has suffered the longest internet shutdowns in 2020 globally.

Facts:

Key Takeaways from the report:

• Globally, internet shutdowns cost the world economy $4 billion. However, this represents a 50% decrease in impact compared to $8.05 billion in 2019.
• India has suffered the biggest economic impact in the world in 2020 due to Internet shutdowns adding up to 8,927 hours and $2.8 billion losses.
• Among 21 countries that curbed internet access last year, the economic impact seen in India was more than double the combined cost for the next 20 countries in the list.
• India continued to restrict Internet access more than any other country — over 75 times in 2020.The majority of these short blackouts were highly targeted, affecting groups of villages or individual city districts.
• The report made a separate mention of the extended curbs on Internet use in Jammu and Kashmir. It has called it as the longest Internet shutdown in a democracy.

Article Source

News: National Statistical Office(NSO), Ministry of Statistics and Programme Implementation(MoSPI) has released the First Advance Estimates (FAE) for 2020-21.

Facts:

• What are the First Advance Estimates(FAE)? For any financial year, the MoSPI provides regular estimates of GDP. The first such instance is through the FAE. The FAE for any particular financial year is typically presented on January 7th.
• Significance: FAE significance lies in the fact that they are the GDP estimates that the Union Finance Ministry uses to decide the next financial year’s Budget allocations.
• Based on: The FAE are based on the benchmark-indicator method. The sector-wise estimates are obtained by extrapolation of indicators like:
  • Index of Industrial Production(IIP) of first seven months of the financial year
  • Financial performance of listed companies in the private corporate sector available up to quarter ending September,2020
  • First Advance Estimates of crop production
  • Accounts of Central and state governments
  • Information on indicators like deposits and credits, passenger and freight earnings of Railways, passengers and cargo handled by civil aviation, cargo handled at major sea ports, sales of commercial vehicles available for the first eight months of the financial year.

Key Takeaways:

• GDP: India’s real GDP (Gross Domestic Product) is estimated to contract by 7.7% in 2020-21, compared to a growth rate of 4.2% in 2019-20.India will witness a negative GDP growth rate for the first time after 1979-80.
  • Reason: The reason for the contraction has been the disruption caused by Covid-induced lockdowns which saw the economy contract by almost 24% in the first quarter and by 15.7% during the first half of the year.
• Gross Value Added(GVA): It provides a picture of the economy from the supply side. It maps the value-added by different sectors of the economy such as agriculture, industry and services. The real GVA will also shrink by 7.2%.
• Positive Growth: Just two sectors are estimated to record positive growth in GVA this year with Agriculture continuing its strong run through the first half of year to the second half (3.4%) and Electricity, Gas, Water Supply & Other Utility services(2.7%).
  • However, the sharpest decline in the pandemic-dented year is expected to be in the Services Sector.
• Private Final Consumption Expenditure (PFCE): The biggest demand for goods and services comes from private individuals trying to satisfy their consumption needs. This demand is called PFCE and it constitutes over 56% of the total GDP. It is expected to be almost what it was in 2017-18.
• Gross Fixed Capital Formation (GFCF): The second biggest component of GDP is called GFCF and it measures all the expenditures on goods and services that businesses and firms make as they invest in their productive capacity. This type of demand accounts for close to 28% of India’s GDP. It has fallen below the 2016-17 level.
• Government expenditure: It is expected to show a robust growth of 17% in the second half of the year, despite the challenges faced by the government on fiscal consolidation and the fact that government expenditure fell 3.9% in the first half of the year.

Article Source

Source: The Indian Express

News: The current account surplus moderated to $15.5 billion (2.4% of GDP) in the quarter ended September of 2020-21 from $19.2 billion (3.8% of GDP) in the first quarter this fiscal.The current account saw a deficit of $7.6 billion(1.1%) in the year-ago quarter.

Facts:

• Why has current account surplus narrowed? The narrowing of the current account surplus in Q2 of FY21 was on account of a rise in the merchandise trade deficit to $14.8 billion from $10.8 billion in the preceding quarter.

Read Also : Current affairs for upsc

Current Account:

• What is the Current Account? Current account maintains a record of the country’s transactions with other nations, in terms of trade of goods and services, net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.
  • This account goes into a deficit when money sent outward exceeds that coming inward.
• What does Current account constitute? The current account constitutes net income, interest and dividends and transfers such as foreign aid, remittances, donations among others. It is measured as a percentage of GDP.

Current Account = Trade gap + Net current transfers + Net income.       abroad

• Why does Current account matter? Current account balance measures the external strength or weakness of an economy.
• A current account surplus implies the country is a net lender to the rest of the world, while a deficit indicates it is a net borrower.
• A country with rising Current Account Deficit(CAD) shows that it has become uncompetitive, and investors are not willing to invest there. They may withdraw their investments.

Synopsis: Government should adopt a fiscal stimulus Path for the economic recovery of India, to make our economy grow at 9% GDP in the coming years. 

Background 

• The impact of the pandemic has pushed India to impose stringent lockdown measures to save millions of lives of Indian citizens but it’s after effect has caused massive economic disruption. 
• This has resulted in fall of GDP by around 7.5 percent for this full year which has dented our aspiration to become a$5 trillion economy by 2024. 
• Though nothing much can be done for what has happened, in the coming years India needs to get back to the trend line of growth (pre-COVID years) to sustain the aspiration of our young population.

How different sectors are performing currently? 

• The sectors which have shown a positive sign of recovery are
  • • Pharmaceuticals and chemicals, the FMCG sector, the two-wheeler sector, Construction equipment’s driven by rural demand from sales to individuals, Capital goods.
• In contrast, Sectors that are still struggling for a full recovery are
  • • Mainly, the travel and tourism sector, real estate and construction sector, and retail which are significantly high employment sectors.

So, what steps must the government take?  

Though the recovery underway is solid, but we need measures to sustain and deepen it. The government can do three things. 

• First, the government should resort to fiscal stimulus by paying long-overdue government bills. Few examples are, 
  • • Distribute the pending tax refunds, pay the bills of all companies (large and small), pay off the many arbitration award spending where the government has lost cases, and pay state governments their pending GST dues. 
• Second, invest in public health infrastructure and centre should finance state government efforts to build an extensive public health network. 
  • • While this will equip as to handle a possible second wave of the virus, on the other, it will spread confidence.  
    • Also, it is essential for the government to work in partnership with private sector hospitals.
• Third, invest massively in infrastructures such as roads, ports, logistics. Areas, where investment can be channelised, are,
  • • By Providing decent, accessible housing to improve the living conditions in slums across our cities by providing right public-private program.
    • By providing cheap connectivity into our cities.
    • Even, the 20 trillion infrastructure pipeline project that requires massive funding can be considered.

How the funds for the above will be sourced?  

• To mobilize its resources that are needed to finance the above measures, the government can opt for a huge privatization programme (Disinvestment) 
  • • Under this program, the government should intend to reduce its share-holding to 26 percent across public-sector banks, steel companies, oil companies, and every manufacturing company and hotel it currently owns. 
    • This announcement might trigger a big rally in the stock prices of PSUs, increasing return. 
• To stem the protests due to big reforms,we are witnessing currently, the government should choose democratic methods for implementing them such as use of discussion papers for public comment, the debate in Parliament.   

We need to act swiftly to regain from stunted recovery. We must use our economic crisis as an opportunity to set some bigger things right that we have ignored for too long. 

Synopsis: As 2020 is coming to an end, we should ponder upon the issues the country faced this year and ensure that 2021 does not become another wasted year.

What are the issues India faced in the Vital notes  year 2020?

• Pandemic: The COVID-19 pandemic had an impact on every segment of Indian society and infected approximately more than a crore of its citizens (1.5 lakh fatalities).
• Border stand-off: India is facing an unexpected border stand-off situation with China in eastern Ladakh. The tensions even led to martyrdom of Indian soldiers. This has had a serious impact on India-China relations.
• Internal Security issues: The bitterness caused by the altered status of J&K and the custody of political leaders and the Naxalite violence have resulted in serious internal problems.
• States: There lies a grave concern for violence in the upcoming elections of West Bengal.
• Economy: The economy is in recession. India has fallen down the scale in the Human Development Index and in the Global Economic Freedom Index.
• New bills on social issues, for instance:
  • A law against forced conversion by marriage will intensify an already divisive society.
  • The farmers’ agitation is another instance where official inflexibility has led to a situation in which the Supreme Court had to intervene.

What should India do in the upcoming year?

Series of electoral successes for the ruling party; the personal popularity of the Prime Minister; and the absence of any strong competitor on the national stage gives the current government an opportunity to bring solid changes.

• Firstly, India should come up with a new model of ideas for foreign policy which can be implemented. This would enable India to be viewed as the only nation in Asia that can stand-up to the China challenge.
• Secondly, the idea that says India should look inward rather than outwards to enlarge its economy needs to be rejected, and India should enhance its export capacity.
• Thirdly, the government should take crucial steps to resolve the troubles in the labour market caused by the pandemic and other contributory factors.
  • Creating new jobs in new industries should be a critical requirement.
  • Stimulating demand would ensure growth in job opportunities.

Way forward

• Effective cooperation between the Centre and the States must be restored to impart confidence about India’s democratic future.

Context: It is important that, only if the Indian economy grows at 8% in 2021-22 we will be able to compensate for the decline in 2020-21.

What needs to be done to make Indian economy to grow @ 8%?

• Accommodative Monetary policy: A reduction in interest rate through changes in policy rate, providing liquidity through various measures, and regulatory changes such as moratorium.
• Fiscal initiatives: A sharp increase in government capital expenditures which can act as a stimulus for growth. To increase government spending, government revenues should pick up with the rise in GDP and the fiscal deficit must be brought down.
• Growth and investment: The investment rate has been falling. In 2018-19, the rate fell to 32.2% of GDP from 38.9% in 2011-12. A detailed investment plan of the government and public sector enterprises must be drawn up and presented as part of the coming Budget.
• Exports: Closing borders may appear to be a good short-term policy to promote growth but it kills growth all around. A strong surge in our exports will greatly facilitate growth, in 2021-22.

What is the way forward?

• Strong effort must be made to improve the investment climate. The National Infrastructure Pipeline is a good initiative, but the government must come forward to invest more on its own.
• Reforms are important but the timing, sequencing and consensus building are equally important. For example, Labour reforms, are best introduced when the economy is on the upswing.

The Indian economy in 2019 was at around $2.7 trillion. To achieve the level of $5 trillion, we need to grow continuously at 9% for six years from now.

What are the issues facing Indian Economy?

• COVID pandemic has pulled down the global economy and India’s economy is one of the worst affected among them.
• In the first quarter of the financial year (April-June), India’s economy had contracted by an unprecedented 23.9%. Whereas in the second quarter, after a bit improvement, economy contracted by 7.5%, less than the anticipation.
• With the result of 2^nd quarter, India has slipped into the Technical recession, which requires economy to be negative or declining for two consecutive quarters or more.
• Although some economist argue that when growth rate is measured on quarterly basis, instead of year-on-year basis, India’s GDP plunged 25 per cent in 2Q20 and recovered by 21 per cent in 3Q20. Thus, India’s economy is not in the technical recession.

Before we move any further in this article to understand the causes behind slowing Indian Economy, first we need to understand the components of the GDP.

How to calculate GDP using Expenditure method?

Final goods and services produced in a country during a period of time are taken into account under expenditure method of calculating National Income or Gross Domestic Product. In this method final expenditure made by each stakeholder is taken into account.

Final expenditure is that part of expenditure which is undertaken not for intermediate purposes.

Following is the formula for calculating GDP by expenditure method;

GDP = C + I + G + (X − M)

1. C (Consumption) represents the consumption expenditure by the households on Final goods and services, known as Private Final Consumption Expenditure (PFCE).

PFCE is the biggest component of the GDP and constitute around 55-57% of the GDP.

2. I (Investment) represents business investment on equipment. It includes Gross Fixed Capital Formation (GFCF) and Inventory.

• GFCF includes Investment made in the long-term assets by government and private sector and investment in residential units by business or households.
• Inventory investment includes investment for procuring raw materials and finished or unfinished goods.

Investment constitute around 30-32% of the GDP.

GFCF Includes investments from Government, Businesses and households. 25% of I is constituted by government investment (Centre, states and PSUs) and 35-40% each is that by the corporate (India Inc.) and non-corporate (MSMEs and household investment in real estate) private sector.

3. G (Government) represents sum of government expenditures on final goods and services including salaries, weapons, investments, etc., also known as Government Final Consumption Expenditure (GFCE).

It doesn’t include the investment in financial products.

GFCE constitute around 10-12% of India’s GDP.

4. X represents gross exports and M represents gross imports. Balance of both is called net exports.

What are the causes behind falling GDP growth?

Demand related issues (PFCE)

• Consumer demand is falling in urban India. Sales of domestic cars and commercial vehicles are on decline even before COVID pandemic. More than 2.1 crore individuals have lost salaried jobs due to the pandemic since April, and economists estimate the number to increase in future as companies struggle to run smoothly.
• While many of those didn’t lose their jobs, saw their salaries drastically reduced.
• Wage growth rate in rural area has declined to a new low. 10 million more rural households are seeking MGNREGA employment per month since August compared to a year ago.

Effect on the GDP

• Fall in income of households is leading to drastic fall in aggregate demand for goods and services i.e. Private Final Consumption Expenditure (PFCE). PFCE remains in the negative territory, at -11.3% in Q2. Private consumption demand, is the mainstay of the economy as it contributes around 55-60% of GDP.
• Loans for households are although easily available after government stimulus package, but due to uncertainty of the future income and savings, people are apprehensive of taking loans at present.

Investment and supply related issues (GFCF)

• Growth rate in eight core sectors is sluggish. That means even if the demand is improving industries will not be in the position to meet those demands.
• As per All India Manufacturers Organization’s June survey, about one-third of small and medium-sized enterprises indicated that their businesses were beyond saving.
• Unorganised sector, which is specifically dependent upon daily cash flows and lacking organised fund sources like loans and finance from the institutions, has been badly affected. This sector was already badly affected by demonetisation and GST, COVID pandemic has reduced the possibility of revival of many firms working in this sector.

Impact on the GDP

• Gross Fixed Capital Formation (as % of GDP) had been on a constant decline (except in 2018) between 2014 and 2019, falling from 30.1% to 27.4%. In Financial year of 2020-21, GFCF was contracted by 7.3% in Q2, compared to 47.1% in Q1.

Government expenditure related issues (GFCE)

• The central government’s total expenditure (both revenue and capital) has been declining sharply since 2010-11. From a high of 15.4% of the GDP in 2010-11, the total expenditure has hit a low of 12.2% of the GDP in 2018-19.
• The capital expenditure component has dropped from 2% of the GDP in 2010-11 to 1.6% in 2018-19 and that of the revenue expenditure from 13.4% in 2010-11 to 10.6% in 2018-19.
• This decline in expenditure is driven by the government’s priority to contain fiscal deficit.

Impact on the GDP

• Most worrying part for economy is a fall in government spending. Although government has announced stimulus package for revival of economy, but actual fiscal support has not been commensurate as expected. Government-Fixed Capital Expenditure (GFCE) growth has declined by 22.2% in 2^nd quarter after improvement of 16% in the first Quarter.

Why government is not able to provide direct fiscal support?

• Centre’s net revenue (tax and non-tax) collection for the first half of this fiscal is merely 27.3 per cent of the budget for the full fiscal year.
• Center’s capital expenditure has registered a decline of 11.6 per cent.  Capital expenditure is defined as the money spent on the acquisition of assets as well as fresh investments
• Market borrowings of both the Centre’s as well as the states’ have increased by 50 per cent year-on-year basis. Due to that India’s public debt/GDP will likely reach around 85 per cent. High debt-servicing costs will further crowd out productive public expenditure.
• Central government fiscal deficit is also inflating.

Why there is a need of direct income support from the government?

Although government has announced stimulus package for revival of the economy that includes benefits for industries, poor people and MSMEs etc., however all these benefits may not be able to provide economy with the immediate boost required at this point of time;

• At times of slowdown in industrialised economies, there is idle productive capacity on the one hand and unemployed manpower on the other.
• Unemployment reduces the purchasing power capacity of the households, resulting in low aggregate demand.
• Increase in Government expenditure or investment on infrastructure lead to expansion of productive capacity and generate long-term economic growth.
• While the infrastructure spending and reforms are critical to sustain medium and long term growth, neither can boost near-term demand. A stimulus package focused on giving direct benefits to the middle-class could help alleviate the situation.
• Increase in direct benefit transfers to people lead to immediate increase in aggregate demand of household for goods and services. Increase in aggregate demand leads to fuller utilization of the existing productive ca­pacity and employment generation.
• Thus, Fiscal spending (government expenditure), as against fiscal conservatism, is favoured because this can be mobilised quickly to deliver results in a shorter timespan while others need longer timeframes to get activated and deliver.
• Bank recapitalisation for increasing credit flow in the economy is another way to boost demand in the economy.

Way forward

Present time demands government to discontinue its fiscal conservatism approach centred on reducing its fiscal deficit. It is the time to boost the domestic demand by transferring direct benefits, as was done during the 2008 economic recession. Indian economy at that time proved to be resilient and performed far better compared to many developed countries at that time.

Private sector in India is not lacking funds as is the popular perception. It is the lack of confidence in the Indian economy and industries at present that investment in India are reducing. There are sufficient funds available for the government borrowings in the market.

News: United Nations Development Program (UNDP) has released the Human Development Index (HDI) 2020.

Facts:

● HDI measures the average achievements in a country in three basic dimensions of human development:

○ A long and healthy life- measured by Life expectancy at birth

○ Access to knowledge: measured by Mean years of schooling and Expected years of schooling

○ A decent standard of living- measured by Gross National Income (GNI) per capita (PPP US$).

What is PHDI ?

UNDP has introduced a new metric this year called Planetary Pressures-adjusted HDI (PHDI).

PHDI reflects the impact caused by each country’s per-capita carbon emissions and its material footprint which measures the amount of fossil fuels, metals and other resources used to make the goods and services it consumes.

Key Takeaways of HDI 2020:

● Topped by: Norway has topped the index followed by Ireland, Switzerland, Hong Kong and Iceland.

● India in HDI 2020: India has dropped two ranks in the HDI index standing at 131 out of 189 countries. India’s HDI value for 2019 is 0.645— which put the country in the medium human development category

● BRICS: In the BRICS grouping, Russia was 52 in the human development index, Brazil 84, and China 85.

● Neighboring Countries HDI ranking: Bhutan (129), Bangladesh (133), Nepal (142), and Pakistan (154).

Other Takeaways from the index:

● Life expectancy of Indians at birth in 2019 was 69.7 years. This is worse than Bangladesh which has a life expectancy of 72.6 years. The life expectancy in Pakistan is 67.3 years.

● India’s gross national income per capita fell to $6,681 in 2019 from $6,829 in 2018 on purchasing power parity (PPP) basis.

○ Purchasing power parity or PPP is a measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries’ currencies.

● Solar capacity in India has increased from 2.6 gigawatts in March 2014 to 30 gigawatts in July 2019 achieving its target of 20 gigawatts four years ahead of schedule.In 2019, India ranked fifth for installed solar capacity.

For further reference:  UNDP’s HDI and Other Indices

Context- Retail inflation showed signs of easing in November, led by easing prices of some food items.

More in news-

Consumer Price Index inflation stood at 6.93% in November 2020 compared to 7.61% in October, according to data released by the Ministry of Statistics and Program Implementation, though it remained above the comfort level of the Reserve Bank.

What are the reasons for decline in CPI inflation?

1. The movement in retail inflation is broadly driven by the movement in food and beverage inflation which has 46 per cent weight in the consumer price index.

• Within the food items, the inflation declined for vegetables to 15.63%, cereals and products 2.32%, meat and fish 16.67% and milk and products 4.98%.

2. Inflation in the key transport and communication category that includes petrol and diesel eased by a marginal 10 basis points to 11.06%.
3. The inflation for housing eased to 3.19%, while that for miscellaneous items was flat at 6.94% in November 2020.

• Within the miscellaneous items, personal care and effects 11.97%, recreation and amusement 4.57%.

What are the areas of concern for RBI?

1. Inflation remained above the comfort level of the RBI-

• Out of the food basket of 12 items, inflation still remained in the double digits in the case of six.
• Key protein sources including pulses, eggs and meat and fish continued to register worryingly high levels of inflation.

2. Worrying high transportation cost– With oil marketing companies continuing to raise pump prices of these crucial transportation fuels, it is hard to foresee any further appreciable softening in food prices in December.

• This put the RBI’s forecast for average fiscal third-quarter inflation of 6.8% in jeopardy.

Disrupted supply chain logistics, higher operational and labour costs, higher administrative fuel costs partly contribute to the upward inflation trajectory in recent months.

What is the way forward?

• Policymakers must guard against easing vigilance on prices while considering growth-supportive measures.
• Price stability must remain the monetary authority’s primary target.
• The decline in the CPI inflation print in Nov 2020 to 6.93 per cent from 7.61 per cent in Oct 2020 has definitely come as a relief to the bond markets.

Context- The government’s unusual reluctance in providing adequate support to the economy has purportedly been because of the lack of fiscal space.

Is India in a technical recession?

Technical recession– The National Bureau of Economic Research (NBER) in the US defines a technical recession to be in progress when real GDP has declined for at least two consecutive quarters.

• However, the growth rate is measured on a quarter-over-quarter, not year-ago, basis.

According to JP Morgan’s estimates – On quarterly basis, India’s GDP India’s GDP plunged 25 per cent in 2Q20 and recovered by 21 per cent in 3Q20.

• This implies that India did not suffer two consecutive quarters of negative growth.
• Therefore, India is not in a technical recession.

What is RBI’s survey suggests to real GDP growth?

RBI latest survey of professional forecasters (SPF) has forecast that real GDP is expected to recover in FY22 to 12 percent from -9 percent in FY21.

• This implies that six quarters from now it will still be about 7 per cent below the pre-pandemic path, or $300-billion-a-year of income losses across two years.
• Concern- This can cause great damage to household and SME balance sheets, to income inequality, to poverty, and to women’s employment

What are the issues with government policy?

1. No income support– The income loss could have been mitigated by budgetary income support. However, the government chose not to provide this.

• Government consumption declined 22 per cent on a quarterly basis in 3Q.

2. Limited support to the domestic economy – Despite the apparent lack of fiscal space at home, the RBI has been funding other countries’ fiscal deficits.

• RBI invested almost 3 per cent of GDP in foreign assets just in the first half of this fiscal year.

3. India’s huge current account surplus is a bane– This reflected not economic strength but an economy imploding so much faster than others that India’s demand for imports fell faster than foreign demand for Indian exports.
4. Ongoing recovery led by capital than wages – Indian companies reported a decline in sales. However, operating profits growth was in the double digits. Net profits grew even faster. Large firms achieved this by slashing costs.

• A recovery led by profits will not lead to higher investment demand as long as there is significant excess capacity in many parts of the Indian economy.
• As far as the labour market goes, unemployment has dropped below pre-covid levels, but that is partly because of a decrease in the labour participation rate.

What is the way forward?

Government needs to provide extensive income support to mitigate the income losses due to pandemic.

• Government needs to be ensured that the recovery is not hamstrung by damaged household and SME balance sheets because of the extended loss of wages and incomes.
• Infrastructure spending and reforms are critical to sustain medium-term growth, neither can boost near-term demand.

Context- The higher growth rate of the economy actually masks the decline in the unorganized sector.

What in the news-

The second quarter GDP contracted at a slower pace of 7.5 per cent compared to a massive 23.9 per cent in the first quarter of the current fiscal.

• The economy’s performance between July and September when lockdown restrictions were eased is better than most rating agencies and analysts anticipated.

Why GDP data should not be taken as sustainable recovery?

1. The source of information is not reliable– Very little up-to-date primary information from factories and offices is available for the estimation.

• The data usually used to project quarterly growth rates were not available and so “some other data sources” were used.
• The method of calculation of quarterly growth rates is inaccurate.It was implicit in the method of estimation that this component could be proxied by the data from the organized sectors of the economy.

2. Pent up demand- The healthy recovery in the second quarter represents meeting the pent-up demand after the ‘Unlock’ phase started in June.

How the proportionality between the unorganized and organized sectors disrupted?

1. Due to demonetization– The cash shortage impacted unorganized sectors far more than the organized sector.

• The non-agriculture unorganized sector was disproportionately impacted by demonetization, as this sector consists of tiny units that work with cash.

2. Implementation of the GST-The GST system favoured the organized sector, and demand shifted from the unorganized sector to the organized sector.

Why quarterly growth numbers are not robust?

1. Collected data limited to organized sector only.

• The growth of the economy has been much less than that what is implied by the official GDP numbers.
• While trade has declined, data will indicate growth since it is available only from e-commerce and big stores [organized sector].
• If the data are taken only from the larger units, the decline of 20% to 30% will not be captured.
• Not all data are collected– The organized sector was able to restart business but not the unorganized sector due to low demand for the produce of unorganized sectors

Way forward-

• The quarterly growth numbers are not robust.
• It is difficult to predict that weather the economy is recovering or not, as the collected data was non comparable.

Context: The government’s economic recovery hype is no rights and this is not a time for fiscal conservatism.

What is current economic scenario?

• India’s economy contracted by 7.5% in the second quarter of financial year 2020-21 was, both good and bad.
• It is far lower than the 23.9% contraction registered in the first quarter of this financial year.
• second-quarter contraction is high with most similarly placed countries.
• Relaxation of lockdown restrictions during that quarter has not ensured automatic recovery.

What is government stance?

• Based on the evidence, the Finance Ministry’s Monthly Economic Report, for November, speaks of a V-shaped recovery reflective of “the resilience and robustness of the Indian economy”.

Why slowdown in contraction is no sign of recovery?

• Lockdown has affected employment, income and demand:
  • Now since lockdown are relaxed, production must rise, not just to meet demands backed by the available purchasing power but also to restore inventories to normal levels across the distribution chain.
  • Demand must return to and rise above pre-crisis levels for production to recover and grow.
• Burden on economy: The lockdown increased indebtedness and the bankruptcies. Lockdown induced affects are to be felt well after restrictions are relaxed.
• Decline in consumption: the decline in private final consumption expenditure at constant prices, which accounts for 56% of GDP, has come down but still remains high.
• Lack of consumer confidence: net incomes and consumer confidence are not at levels that can even restore last year’s levels.
• Less recovery in investment: the decline in fixed capital formation has fallen from a high minus 47% in the first quarter to minus 7% in the second, however, investment is still falling year-on-year.
• Half-hearted stimulus: Government Final Consumption Expenditure, which rose by 10% in the first half of 2019-20, relative to the corresponding period of the previous year, declined by 4% in the first half of 2020-21.

What government should do?

• Shun fiscal conservatism: Lockdowns limit production and result in a rundown of inventories.
• Government’s responsibility: the tasks of providing safety nets, reviving employment and spurring demand become crucial. The market cannot deliver on those fronts that is why state action facilitated by substantially enhanced expenditure is crucial.
• Increase borrowing: since government revenues shrink during a recession expenditure need to be funded by borrowing.
• GDP movements: need to understand the dynamic of the post-COVID-19 economy.
• Increase allocations for welfare expenditures: for example, subsidised food to minimal guaranteed employment.

What are the impacts on States?

• Squeezing expenditure at the State level: As per Office of the Controller General of Accounts, the total expenditure of the central government stood at 55% of what was provided for in the Budget for 2020-21, which was woefully inadequate even for normal times.
• Shortfall in spending: The shortfall in spending was sharper in the case of capital expenditure, with 48% of that budgeted being spent over April to October. The corresponding figure for 2019-20 was 60%.
• Fall in GST revenues: the government has decided not to compensate for the shortfall, as promised under the GST regime.

Source: Click here

Finance Ministry’s Monthly Economic Review report has stated that the Indian Economy is witnessing a V-shaped recovery as the decline in the GDP has narrowed to 7.5% in the second quarter of 2020-21 from 23.9% in April-June quarter.

Facts:

• V-shaped recovery: It is characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline.
• Significance: Because of the speed of economic adjustment and recovery in macroeconomic performance, a V-shaped recovery is a best case scenario given the recession.
• Example: The recoveries that followed the recessions of 1920-21 and 1953 in the U.S. are examples of V-shaped recoveries.
  

  Read Also : current affairs for upsc

Context: A recovery led by profits, at the expense of wages, has implications for demand, inequality and policy.

• GDP is typically reported in two ways: The sectoral, production side (agriculture, manufacturing, services) and the functional, expenditure side (consumption, investment, net exports).
  • Third way: On the income side, GDP is calculated as the sum of profits, wages and indirect taxes.

Discuss the role of factors of production in economic recovery.

• Capital: The economic recovery in many parts of the world is too twisted for comfort, driven excessively by capital than labour.
  • If listed company profits are growing at 25 per cent, and yet GDP contracted 7.5 per cent, it reveals significant pressure on profits of unlisted SMEs, wages and employment.
• Labour market pressures around the world: US hiring slowed sharply in November and the unemployment rate is still forecasted to remain close to 6 per cent i.e. almost twice pre-COVID levels even at the end of 2021.
  • Household demand for MGNREGA remains very elevated, suggesting significant labour market slack.
• The employment rate: Some labour market surveys still reveal about 14 million fewer employed compared to February.
  • Nominal wage growth across a universe of 4,000 listed firms has slowed from about 10 per cent to 3 per cent over the last six quarters.

Why does this matter?

• Weak demand: It disincentivises re-hiring, reinforcing the risks of settling into a sub-optimal equilibrium.
• Worry for future demand: It may be normal for any one firm to boost profits by cutting employee reward. But if every firm pursued that strategy, It simply dismantles future combined demand and profitability for all firms.
• Acceleration of technological adoption: Differential productivity impacts on capital, skilled and unskilled labour, will likely have more deep impacts on the future capital-labour mix, possibly stressing existing inequities.
• Job-market pressures: If job-market pressures convince households into observing this shock as a quasi-permanent hit on incomes, households will be incentivised to save, not spend in the future.
• Global recovery: If labour market pressures dent private consumption, and an incomplete global recovery in 2021 dents export prospects.
  • There will be no authoritative for entrepreneurs to invest, especially with manufacturing utilisation levels below 70 per cent heading into COVID-19 outbreak.
• Fiscal policy: US policymakers are negotiating yet another fiscal package, and only a small fraction of the large discretionary stimulus that the Euro Area and Japan injected will be reversed next year.
  • India’s fiscal response has been controlled so far. It’s therefore important for the Centre to step up spending in the remaining months.

What is the way forward?

• Public investment and a large infrastructure push: Must be the theme of the next budget. This will be crucial to boost demand, create jobs, crowd-in private investment and improve the economy’s external competitiveness.
• Monetary to fiscal: In 2021, the stick must pass from monetary to fiscal, especially since the latter is a more surgical instrument to target SMEs and the labour market.

Context- The Q-2 sharp recovery is very tactical because of pent-up demand, because of lockdown and the Data used for quarterly growth rates are weak and questionable.

What in the news-

The second quarter GDP contracted at a slower pace of 7.5 percent compared to a massive 23.9 percent in the first quarter of the current fiscal.

• The economy’s performance between July and September when lockdown restrictions were eased is better than most rating agencies and analysts anticipated.

Critic’s view– India had introduced one of the strictest lockdowns in the world which has resulted in the sharpest output contractions and massive losses in terms of jobs and livelihoods.

Why GDP data should not be taken as sustainable recovery?

1. The source of information is not reliable– Very little up-to-date primary information from farms, factories and offices is available for the estimation.
2. Pent up demand- The healthy recovery in the second quarter represents meeting the pent-up demand after the ‘Unlock’ phase started in June.

However, the quarterly figures do indicate the broad direction of change.

• GDP in the manufacturing sector– It rose 0.6 percent in the September quarter, in a big sign of recovery compared with a crash of 39.3 percent in the April-June period.

What are the challenges for sustainable recovery?

1. Weak aggregate demand-

• Revenue shortfalls- The government’s debt-GDP ratio has gone up though.
• Bank credit growth in the economy continues to decelerate.
• The cumulative growth of the index from April to October this year stood at negative 13% when compared to the same period last year.

2. Balance of payment surplus– the shortfall is on account of a sharp decline in investment demand, denting potential output.

• Both exports and imports have shrunk but imports have shrunk relatively more than exports, such a sharp fall in import demand does not augur well for a growing economy such as India.

3. Rising foreign exchange reserves- India’s flourishing foreign exchange reserves are made up of short-term debt flows; they are not our net export earnings.
4. Sudden booming stock market– This entirely driven by short-term foreign capital inflows.

• Such inflows are highly fickle, representing hot money, which can quit the financial markets in a jiffy if perceptions change for any exogenous reason.

Way forward-

• As an additional expenditure on government consumption or investment or credit growth remain muted, recovery is likely to remain modest.
• Economic recovery could still prove to be premature and illusory – Economists have reservations about reading too much into the September-October data as a sustainable trend.

Context: The pandemic has delivered a “scissor cut” to the government finances.

What is the current scenario?

• Economic output and government revenues are shrinking.
• The government has to spend more to safeguard lives and livelihoods.
• Widening deficit.
• Most of state’s revenue come from center which changes their debt servicing ability for the worse.

What are the recent issues?

• Revenue side:
  • In the first half of fiscal the center’s net revenue (tax and non-tax) collection stood at 27.3% of budget for the full fiscal year compared to 41.6% of previous fiscal year.
  • Revenue collections in the first half of the year were down to 32.5% as compared to an average 15% growth over the same period.
• State’s fiscal issue:
  • Fiscal data for the year is available only for the eleven non special category states.
  • Revenue of these states is down by 21.5%.
  • Adding center’s transfer to the states then the decline in revenue reduces to 16.5%.
  • Shortfall in states’ revenue is much steep than that of center.
  • For the eleven states total expenditure and capital spending have contracted by 1.5% and 23.4 % respectively.
  • Allocation for pension and subsidies down by 10% and 20%.
  • Since health is State subject, state will have to shoulder major part of health expenditure burden on account of the pandemic.
• Cutting capital expenditure:
  • Both center and state have cut their capital expenditure.
  • This is worrying as states undertake more as they have more than 60% of the overall general government capital expenditure.
  • For instance, in 2019-20, capital expenditure by states stood at rs 4.97 lakh crore down by 20%.
• Low capacity utilization: for instance, it was 71.9 % in the previous year which is down to 58.6 %.

What are the consequences?

• Reduces Center’s and states’ ability to invest and lift the economy.
• Need of more borrowing.
• Centre’s total expenditure has been declined by 0.6 % which led to 11.6% decline in capital expenditure with revenue expenditure by 1 %.
• To maintain states ‘spending government has forced them to increase borrowing which has led to increase in market borrowing by 50%.
• Rising debt level of states. For instance, overall government general debt stood at nine year high.
• Centre’s debt to GDP is declining.
• Ratio of interest payment to revenue receipts is also declining which raises question on sustainability of debt.
• The private sector will remain wary of investing as demand uncertainty continues.

Context: Arvind Panagariya’s new book, India Unlimited: Reclaiming the Lost Glory, discuss systematically how to reconstructs a path to higher growth.

What is the present scenario?

• Public sectors confronting a mountain of debt, the fiscal will need to be reined in post-COVID across several emerging markets.
• COVID-19 will accentuate the prevailing export pessimism, as global potential growth is damaged and protectionist instincts are stoked.
• The choice and sequencing of reforms will depend critically on the growth philosophy India embraces.

What are the possible strategies?

• India’s size provides fertile ground for import substitution. However, this approach was not successful in the past.
• The most significant is to underscore the necessity of export-led growth to India’s prospects.
• No emerging market has been able to sustain 7-8 per cent growth for any length of time without relying on the Siamese twins of exports and investment.
• Dismantle the underpinnings of export pessimism.

Why there is need to focus on exports?

• Prospects in exports: Global merchandise exports stood at almost $18 trillion in 2017 (more than six times India’s GDP) with India commanding an export share of just 1.7 per cent (versus China’s 12.8 per cent).
• Doubling exports: Even if the global market shrinks to $15 trillion, India could double its exports by raising its global market share to just 4 per cent. India’s 2002-2010 growth boom was underpinned by exports, which grew 18 per cent a year for eight years.
• Labour-intensive manufacturing: For many labour-intensive tasks, automation is still infeasible. Adidas, for example, produces only 1 million of its 360 million pairs of shoes in automated factories.
• Geopolitical reasons: Chinese real wages are rising; the workforce is shrinking and the embattled relationship with the US.
• Integration: integrate into the Asian supply chain by attracting multinational companies seeking a China hedge in the region.
• Create jobs: exports can create manufacturing jobs which will serve as a powerful magnet to attract labour away from agriculture. By 2030, agriculture will constitute less than 10 per cent of GDP while still employing 35-45 per cent of the workforce.

What are the challenges that lie in front of India?

• India’s fragmented industrial structure: It’s estimated almost 60 per cent of India’s manufacturing workforce is employed in firms with five or less workers, and 75 per cent in firms with 50 or less workers.
• Low productivity and low wages: For example, 92 per cent of workers in the apparel sector worked in firms with less than 50 workers. In contrast, 57 per cent of China’s apparel workforce were employed in firms with more than 200 employees.

What needs to be done?

• Avoiding the import-substitution trap.
• Reduce Import tariff which are equivalent to an export tax.
• Ensuring the rupee remains competitive.
• Boosting free trade agreements and trade facilitation.
• Creating autonomous employment zones (AEZs) where factors of production are less distorted.
• Reduce the gulf in per-capita incomes between agriculture, industry and services.
• Create higher-wage jobs in industry and services for agricultural workers to migrate to.

The Labour and Employment Ministry on Thursday revised the base year of the Consumer Price Index for Industrial Workers (CPI-IW) from 2001 to 2016.

Why the base year for the Consumer Price Index for Industrial Workers(CPI-IW) has been changed?

Due to the changing consumption pattern, more weightage has been given to spending on health, education, recreation and other miscellaneous expenses while the weight of food and beverages has been reduced.

Consumer Price Index (CPI) for Industrial Workers

It measures changes in the price level of a market basket of consumer goods and services purchased by households.

CPI data is released monthly by the Central Statistics Office (CSO) which functions under the Ministry of Statistics and Programme Implementation.

There are four types of CPI: a) CPI-IW (Industrial Worker), b) CPI-UNME (Urban Non-Manual Employees), c) CPI-AL (Agricultural Labourers) and d) CPI-RL (Rural Labourers)

RBI has adopted CPI as the key measure for determining the inflation situation of the Indian economy on the recommendation of the Urjit Patel Committee.

Usage of CPI-IW

CPI-IW  is used:

• To regulate the dearness allowance (DA) of government staff and industrial workers.
• Apart from measuring inflation in retail prices.
• To revise minimum wages in scheduled employments.

After this Index, the government is expected to announce a new series of the CPI for agriculture workers, which is currently using the base year of 1986-87.

Need for Base years 

Base years are required to facilitate inter-year comparisons of various data.  if an index is using 2011-12 as the base year, data of all future years will be calculated based on the data of the index in 2011-12, for the purpose of comparison.

Example: Let’s say the cost of a basket of goods in an index was Rs 6 lakh in the base year (2016), and has been set to an index value of 100. If in 2017,  the basket cost has been increased to Rs 6.6 lakh, the index equivalent would be 110.

The inflation rate will be computed by comparing 110 which is today’s value to the base value which is 100, resulting in a 10% increase.

Base years are used to nullify the impact of inflation on the data and project the actual estimates.

Thus, for selecting a year as the base year, certain requirements should be fulfilled, such as:

• The year must be a normal year and not have experienced any abnormal incidents such as earthquakes, droughts, floods,  etc.
• No abnormal economic activity like Hyper rise in price should have taken place.
• Base year should not be very far from the current year.

Source: Indian Express

Syllabus: Gs3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context: For the year 2020, the per capita income of an average Bangladeshi citizen would be more than the per capita income of an average Indian citizen.

Why India’s per capita income has fallen below Bangladesh this year?

• Contracted Growth: India’s economy is over 10 times the size of Bangladesh and India’s growth surpassed Bangladesh during 2004 to 2016. However, since 2017 India’s growth rate has decelerated while Bangladesh’s growth rate increased.
• Increase in population growth: Per capita income is calculated by dividing the total GDP by the total population. Compared to Bangladesh, between 2004-2019  India’s population growth was high.
• Covid 19 impact: With India’s GDP set to reduce by 10%, India is one of the worst affected economies whereas Bangladesh GDP expected to grow by 4%.

How has Bangladesh managed to grow so fast?

• Moving away from Pakistan gave the country a chance to plan its own economic and political identity.
• Flexible Labour laws and Higher female participation in the labour force leading to stellar export performance in garments and apparel industry.
• Structure of Bangladesh’s economy is led by the industrial sector, followed by the services sector. With manufacturing sector being more labour intensive creates opportunities for more jobs and are more remunerative than agriculture.
• Whereas India, on the other hand, has struggled to boost its industrial sector and has many people still dependent on agriculture.
• Improvement on social and political metrics such as health, sanitation, financial inclusion, and women’s political representation.
• In the latest gender parity rankings, Bangladesh is in the top 50 Out of 154 countries, while India is at 112.
• The gender parity rankings measures differences in the political and economic opportunities as well as the educational attainment and health of men and women.
• Bangladesh has also performed better in the Global Hunger Index. GHI focuses on four factors: Undernourishment, Child Wasting, Child Stunting and Child Mortality.

However, the level of poverty and illiteracy is still high in Bangladesh, compared to India, resulting in low HDI rank for it. Corruption, Political conflicts and radicalisation are also threatening stability in Bangladesh.

To boost growth, India should reverse its protectionism measures — lower tariffs, embrace free trade agreements, and seek greater integration with global supply chains.

Source- The Indian Express, The Indian Express

Syllabus- GS 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment

Context– India’s economy shrank nearly 24 percent in first [April-June] quarter of 2020, the most drastic fall in decades.

Reasons for GDP contraction

• Draconian lockdown– India had the most intense lockdown starting from March 25, resulting in the unprecedented suspension of economic activity in the first quarter of this fiscal year.
• Parsimonious fiscal response– Fiscal response of the free food, subsidized credit and a handful of transfers to the most vulnerable not only limited the contribution of government spending to the economy, but was also insufficient to offset the drag caused by households and firms scaling back consumption and investment.
• Low growth rate in consumption, investment and export– GDP is contracted because Private consumption, investments by businesses and Import which account for over 88% of Indian total GDP, saw a massive contraction.

Advantages of early lockdown-

1. Slowed down the spread of the virus to provide extra time to resist.
2. Provided extra time to ramp up the health and testing infrastructure.
3. Lower death count as compared to other affected countries.

Figure regarding GDP decline due to COVID-19, economics green shoot and recovering economy in unlock phase-

Figure 1-

• GDP being 23.9 per cent lower was primarily due to the pandemic-induced lockdown.
• India’s death per lakh is an order of magnitude is lower.
• India’s humane economic policy based on the principle that while GDP growth will recover  but human lives that are lost cannot be brought back.

Figure 2-

• The green shoots before the pandemic display that the government’s policy thrust since July 2019 was having the desired impact.
• The services sector has been most affected by the need for social distancing and the lockdown.
• The purchasing managers index (PMI), had trended up sharply with Services PMI registering the best growth by February before dropping precipitously below 50 per cent in March.

Figure 3 and table1-

• The V-shaped recovery in these indicators suggests that the government’s measures are enabling a recovery in the unlock phase.

Different Phases to return to normalcy-

1. Gradual unlocking– Gradual process of unlocking, with supply-chain normalization and pent-up demand resulting in faster sequential momentum.
2. Exiting from the lockdown– The post-lockdown pent-up demand typically fades, while operations plateau below the pre-pandemic levels
3. Exit path from the pandemic– Going back to pre-pandemic levels either through the flattening of the curve, the emergence of vaccines or the development of herd immunity.
4. Post-pandemic new normal– Fourth phase in which potential growth settles lower

Way forward-

Coordinated fiscal and monetary policies are required to finance higher deficits. The RBI has focused on support via liquidity in secondary markets and other regulatory measures to bring yields down, flatten the yield curve, and incentivize banks to buy more government paper. Debt monetization, as Indonesia has already done, might be the second round of defence in coming months.

Source – The Indian Express

Syllabus – GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context – ‘Unlocking’ and ‘Revival package from the government’ are the two basic factors that will determine the course of India’s economy for the rest of the year.

Impact of COVID-19 on GDP

GDP contraction– India’s economy shrank nearly 25 percent in last quarter, the most drastic fall in decades. The following sectors reflects how deep the problem is-

1. Public administration– Higher government spending was in the form of transfer payments rather than spending on goods and services, which resulted in a negative growth number.
2. Manufacturing and Services– The sector has been in the negative zone across the board due to the national lockdown since end of March.

Factors that influence the growth prospects for the coming quarters

 1^st Factor – Unlocking economy activity-

1. Unlocking frictionsin nine core sectors and the MSME segment, which make up 75 per cent of the pre-pandemic GDP, can significantly uplift the economy.

The following sectors are-

Challenges

1. Industries in which it is harder—

• Travel or Entertainment— It will still be in a gradual normalization process, and probably won’t rebound completely until a vaccine is available.
• Real estate– The present stress on home loans can hinder a revival in the residential real estate.

2. Unchanged scenarios– Based on the first quarter performance, 25 per cent of the economy, which would be in the services category, would probably still be struggling in the fourth quarter.

2^nd Factor – Revival package from the government

1. Additional capital expenditure- By increasing capital expenditure [capex], the government can begin a virtuous cycle of creating assets as well as providing employment. This will create a dual impact on the economy.
2. Transfer of Cash benefits– Money in the hands of people can provide an immediate sense of security and confidence, which is the cornerstone to restoring economic normalcy. This will raise the consumption and demand of the economy and can bring back the virtuous cycle in play.
3. Banking system-COVID-19 assistance measures undertaken by the Reserve Bank of India (RBI) and the government such as interest rate reductions, credit guarantee and liquidity enhancement schemes are welcome steps.

Way forward

Government can certainly make a difference by altering its stance on fiscal policy, going in for some pump-priming. It is important to address and resolve ground level issues sector-wise and industry-wise in order to formulate the new policies.

Source: Indian Express

Syllabus: GS3: Mobilization of Resources, Growth, Development and Employment.

Context: India needs to focus on rebuild and recover to achieve economic growth of 7-8 per cent.

Need to address some traditional sore points:

• Pandemic impact: Indian economy is suffering due to the pandemic with declining growth and limited scope for a fiscal stimulus.
• Demand-supply issue: India’s slowdown is largely a structural demand problem that cannot be addressed through piecemeal aid and transfers.
• Contrast in GDP growth:
  • First phase- when growth was driven by domestic investment and global growth.
  • Second phase- the post-global financial crisis stimulus phase.
  • Third phase- the leveraged consumption phase. The economy is estimated to have lost around Rs 20-28 trillion due to a lockdown, with FY2021 growth likely to be around (-) 11.5 per cent.
• Focus on demand side: Consumption led growth provides limited scope for a sharp recovery over the medium term without exogenous (and often unsustainable) triggers.
• To prioritise long term growth: broaden the consumer base by empowering the low and middle-income consumers rather than pushing consumption itself.
• To protect India’s labour market: If the pandemic results in a prolonged retrenchment of the workforce, it will deepen faultiness in labour market.
• Uncertainty and savings: temporary incomes coupled with income uncertainty will induce precautionary savings without any impact on growth.
• Poor social security: The PLFS 2018-19 report places around 24 per cent of the workforce in the regular wage/salary category. However, around 40 per cent do not have a written contract, paid leaves, or security while 70 per cent do not have any written contract. Since most of the workers are informal employee, consumption-led growth in the aftermath of a crisis become a substantial risk.

Steps that should be taken to reform, recovery and rebuild:

• Increase public borrowing: since revenues have cratered, funding of additional expenditure should be done through higher borrowing. public spending should be directed towards sectors such as roads, railways, infrastructure, healthcare and educational facilities to help rebuild the economy
• Set up a Development Financing Institution, and an asset monetisation programme.
• Increase sustainable investment: debt should be seen in the context of future investments being hampered due to current consumption.
• Streamline processes for quick approvals and ensure timely payments to private operators.
• Fiscal prudence: India’s public debt/GDP will likely reach around 85 per cent and the consolidated gross fiscal deficit to GDP ratio could be around 12.5 per cent this year. These metrics will take quite a few years to revert to pre-COVID levels and rapid consolidation will adversely impact growth.
• Any kind of “stimulus” should be well-targeted and have a large multiplier effect.
• Creating steady and well-paid employment for the bottom and middle segments: to broaden its consumer base beyond the top 10-20 per cent of the population to improve long-term growth prospects.
• Inclusive growth: focus on infrastructure and manufacturing as the PLFS 2018-19 report indicates that around 50 per cent of the rural non-agriculture workforce and 35 per cent of the urban workforce is engaged in the construction and manufacturing sectors.
• Make manufacturing easier: the focus should be on labour reforms, fewer/quicker approvals, reducing the compliance burden, and promoting export-oriented sectors.

India needs to address traditional sore points such as the large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles to protect a decade of favourable demographics.

Recently the U.S. determined India’s Digital Services Tax (DST) as discriminatory. It concluded that the DST is causing an adverse impact on American commerce and hence, an action needs to be taken under trade act. Meanwhile, The USTR also said, “DST by its structure and operation discriminates against U.S. digital companies”. But the USTR in its special 301 report missed few important aspects and also completely neglected the global need to tax digital services.

What is Digital Services Tax (DST)?

In 2016 India introduced a 6% equalisation levy. But the levy was restricted to online advertisement services (commonly known as “digital advertising taxes” or DATs). In simple terms, the levy applied on the payments made to a non-resident by the Indians for advertising on their platform.

The government in 2020 introduced an amendment to the equalisation levy in the Finance Bill 2020-21. The important amendments include,

• • A 2% Digital Service Tax (DST) was imposed on non-resident, digital service providers. With this amendment, the foreign digital service providers have to pay their fair share of tax on revenues generated in the Indian digital market.
  • The amendment widens the tax to include a range of digital services. These services include digital platform services,  software as a service, data-related services, and several other categories including e-commerce operations.
  • Companies with a turnover of more than Rs. 2 crores, will pay this tax. 

Why India introduced the Digital Service Tax?

First, the nature of digital service companies. These companies don’t have any physical presence in the markets. Instead, they use intangibles to provide services. For example, one can pay for the Amazon Prime membership in India. But the services of prime membership like watching movies, listening to songs are intangible.

Determining the value of these intangibles is tough. So the government introduced the Digital Service Tax of 2% on non-resident service provider’s revenue in India.

Second, the failure of international consensus.  In 2013, the OECD (Organisation for Economic Co-operation and Development) launched the Base Erosion and Profit Shifting (BEPS) programme. It was launched primarily to find a way to tax digital companies. But no consensus has been achieved yet.  So, in 2016 India became the first country to implement the equalisation levy as a temporary way of taxation. This is then followed by countries like France, UK, etc.

Third, India’s right to tax digital service providers. If a company has users in India and also has an economic connection with India then, India has the right to tax its economic operation. India being a developing country provides large markets for digital corporations. So taxing them is a matter of right.

Fourth, These DST create a level playing field between online and regular (brick and mortar businesses). In 2016, the Akhilesh Ranjan Committee Report had also suggested to tax the digital companies as they enjoy a sustainable economic presence.

What are the accusations mentioned by the US? What India said in reply?

The first accusation, DST is inconsistent with the principles of international taxation. International taxation laws apply to the revenue of companies (not on income), extraterritorial application of DST (Digital service companies present outside India), etc.

• • Indian reply: Several global tax measures like royalty, technical fees are not levied on revenue. Similarly, all US states have laws on remote sellers, and they tax non-US resident entities.

The second accusation, DST does not extend to identical services provided by non-digital service providers. This is a violation of trade practices.

• • Indian reply: When the company is non-digital (i.e., brick and mortar) then that company is subject to Indian income tax. Further, this DST has been introduced to provide a level-playing field.

The third accusation, DST is discriminatory because it targets US companies.

• • Indian reply: The DST is applicable to all digital service providers having an annual turnover of more than ₹2 crores in India-based digital services. As per USTR’s own analysis, only 119 companies in the world would likely be subject to the DST, of which 86 are U.S. companies. So the criteria do not target anyone. It is the result of the asymmetric digital power of US companies.

Concerns associated with DST:

First, the DST as a tax policy targets a single sector (digital services). Economic experts argue that framing a tax policy to target a particular sector is unfair and have disastrous consequences for the growth of that sector.

Second, digital service providers might pass on the tax to consumers. Ultimately, burdening consumers. Just like service tax passed on to consumers, DST can also pass on to consumers if the service provider wishes.

Third, not feasible to separate the digital economy and the global economy. The growing digitization has blurred the line between them. This is one of the prime reasons due to which OECD is unable to arrive at a consensus.

Fourth, the DST might attract Retaliatory Tariffs. The USTR investigations pose a threat of retaliatory tariffs and might trigger the trade war between India and the US. Even the slightest retaliatory tariff will affect the Indian ICT industry’s growth.

Suggestions:

First, India can follow the U.K. model of DST. The major advantages of the U.K. model are,

• The U.K. allows companies to not pay any tax if their net operating margin is negative. By including this, India can avoid criticisms like India’s equalization levy is on revenue and shift towards the profit of the company.
• India can consider taxing only 50% of the revenues from the transactions involving three jurisdictions. For example, an Australian user located in India receiving services from a U.S. company. This will make Indian DST more inclusive and also garners international support.

Second, India has to remain committed to the OECD process. Apart from that, India can mention the ways to tweak DST design or try to achieve consensus. This will make India move ahead and phase out DST and roll out the new agreed tax policy of OECD.

Third, the U.S. government has to realize the challenges in taxing digital service providers and also have to participate in these global talks. This will not be only beneficial for other countries but also a way to make these digital giants accountable.

More than 24 countries have either adopted or are considering adopting, a DST or a DAT after the concept got introduced in India. So the tax challenges posed by the digital economy is not a problem between India and the US. It is a global problem and the US has to accept this and act accordingly.

What is the News?

Delhi High Court has provided interim relief to e-commerce major Amazon. It directed Future Retail Limited(FRL) to maintain the status quo with regard to the transfer of its retail assets to Reliance Retail.

What are the issues in the Future-Reliance deal?

1. What is the Future-Reliance deal? In 2020, Biyani’s Future Group has entered into an agreement with Reliance Retail. Under this deal, Future was to sell its retail, wholesale, logistics and warehousing to Reliance.
2. Why has Amazon objected to the deal? In 2019, Amazon had acquired a stake in Future Coupons in an agreement. As per Amazon, under this agreement, it has the first right of refusal in any stake sale in future retail.
3. Why did Amazon approach Singapore International Arbitration Centre(SIAC)? Amazon and Future Group have under their agreement agreed to refer their disputes to SIAC. Hence, Amazon approached SIAC to appoint an emergency arbitrator to get urgent interim relief.
4. SIAC ruling: SIAC emergency arbitrator had ruled in Amazon’s favour. It put the Future-Reliance deal on hold.

What is the issue now?

1. Enforcement of Ruling: Currently under Indian law, there is no mechanism for the enforcement of the orders of the Emergency Arbitrator. However, a party can move the Indian High Court under Arbitration & Conciliation Act,1996 to get similar reliefs as granted by the Emergency Arbitrator.
2. What has the Delhi High Court said? It ruled that the order of the SIAC was enforceable in India the same manner as an order of this court. This provision is covered under Section 17(2) of Arbitration and Conciliation Act.

Source: The Hindu

News: According to the data from China’s General Administration of Customs (GAC), India’s trade with China declined in 2020 to the lowest level since 2017, with the trade deficit narrowing to a five-year low as India imported far fewer goods from China.

Facts:

Source: The Hindu

 Data Related to Trade between India and China:

• • Bilateral Trade: The bilateral trade between India and China has decreased by 5.6% to $87.6 billion in 2020.
  • Imports and Exports: India’s imports from China shrank by 10.8% to $66.7 billion marking the lowest level of inbound shipments since 2016. However, India’s exports to China have jumped 16% crossing the $20 billion mark for the first time to a record high of $20.86 billion.
  • Trade Deficit: The trade deficit which shows the difference between exports and imports shrank to $45.8 billion, the lowest level since 2015.
  • What were the goods traded between India and China? There was no immediate break-up of the data for 2020. India’s biggest import in 2019 was electrical machinery and equipment worth $20.17 billion. Other major imports in 2019 were organic chemicals ($8.39 billion) and fertilizers ($1.67 billion) while India’s top exports were iron ore, organic chemicals, cotton, and unfinished diamonds.
  • Significance: The drop in India’s imports from China was largely due to a slowdown in the domestic demand in the wake of the pandemic. Hence, this makes it difficult to determine whether 2020 is an exception or marks a turn away from the recent pattern of India’s trade with China.

Data Related to China’s Trade with Other Countries

• Positive foreign Trade growth: China was the world’s only major economy to have registered positive growth in foreign trade in goods.
• ASEAN and EU: Exports to the ASEAN bloc, China’s largest trading partner in 2020 with bilateral trade amounting to $684 billion rose 6.7% while exports to the EU, China’s second-largest trading partner also rose 6.7% as total trade reached $649 billion.
• US: In 2020, the trade between China and US was up 8.3% to $586 billion with China’s exports rising 7.9% to reach a record $451 billion.
  • The trade surplus with the U.S expanded to $317 billion in 2020, compared with the $288 billion at the end of 2017 underlining the limited impact of the tariff measures, trade war and pandemic.

Article Source

News: US Department of Agriculture(USDA) has released its forecast of Indian wheat exports for 2020-21(July-June). USDA has estimated India’s Wheat Exports for 2020-21 (July-June) to be around 1.8 million tonnes (mt), as against its earlier estimate of one mt. That would be the highest ever in the last six years.

Facts:

India’s Wheat Exports:

Source: Indian Express

• Wheat: It is the second most important cereal crop. It is the main food crop, in the north and north-western part of the country.
• Climate: This rabi crop requires a cool growing season and bright sunshine at the time of ripening. It requires 50 to 75 cm of annual rainfall evenly- distributed over the growing season.
• Wheat Growing Regions: There are two important wheat-growing zones in the country – the Ganga-Satluj plains in the northwest and the black soil region of the Deccan. The major wheat-producing states are Punjab, Haryana, Uttar Pradesh, Bihar, Rajasthan and parts of Madhya Pradesh.
• Reason for India’s higher wheat exports: Due to surging international prices from Chinese stockpiling and ultra-low interest rate money increasingly finding its way into agri-commodity markets.
• Concerns: Indian wheat is still not competitive at the government’s minimum support price(MSP) of Rs 19,750 per tonne. The export price of wheat bought in Gujarat is around Rs 20,950 per tonne. That works out to $286 per tonne or $290-plus after adding exporter margins. The above price is higher than the $275-280 that major exporters such as Australia, France, the US, Russia and Canada quoted.
• Suggestions: This disadvantage can be overcome if wheat is sourced at below MSP from Uttar Pradesh, Bihar, Gujarat and Maharashtra where not much government procurement happens.
  • The new crop arriving in these markets would be available at Rs 17,000-18,000/tonne. This wheat can be exported by rail rakes to Bangladesh or shipped to the Middle East (UAE, Oman and Bahrain) and Southeast Asia (Indonesia, Vietnam and Malaysia).

India’s Rice Exports:

• Rice: It is the staple food crop of a majority of the people in India. Our country is the second-largest producer of rice in the world after China.
• Climate: It is a Kharif crop that requires high temperature, (above 25°C) and high humidity with annual rainfall above 100 cm. In the areas of less rainfall, it grows with the help of irrigation.
• Rice Growing Regions: Rice is grown in the plains of north and north-eastern India, coastal areas and the deltaic regions. The development of a dense network of canal irrigation and tube wells have made it possible to grow rice in areas of less rainfall such as Punjab, Haryana and western Uttar Pradesh and parts of Rajasthan.
• India’s Rice Exports: USDA has estimated that India’s rice imports have hit a record 14.4 mt in 2020 up from 9.79 mt and 11.791 mt of the preceding two years. The country’s closest competitors – Thailand and Vietnam – have seen their exports during this period.

Article Source

News: US Trade Representative (USTR) has released the findings of the Section 301 report.  

Source: The Hindu 

The report has said that India’s 2% equalisation levy is unreasonable or discriminatory potentially attracting withdrawal of US trade concessions or duties on Indian exports. 

 What is Equalisation Levy? 

• When was 2% Equalisation Levy introduced? In the Finance Bill 2020-21 a 2% digital service tax (DST) was imposed on non-resident e-commerce operator in India. 

• Eligibility: Companies with a turnover of over Rs. 2 crore, will pay this levy on the consideration received for online sales of goods and services.   

• Purpose: The purpose of the levy is to ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations

Why USTR is concerned? 

• USTR is mainly concerned as 72% companies that will face the levy are American.  
• Aggregate tax bill for US companies will exceed US $ 30 Million.  

What does the Special 301 Report say on Equalization levy?  

The USTR report has said that the Equalisation Levy is a violation of international tax principles: 

1. Firstly, it is discriminatory as the law explicitly exempts Indian companies while targeting non-Indian firms. 
2. Secondly, levy is contravening the international tax principle that companies absent a territorial connection to a country should not be subject to that country’s corporate tax regime. 
3. The third issue is of taxing revenue instead of income. This is inconsistent with the international tax principle that income—not revenue—is the appropriate basis for corporate taxation. 
4. Fourth, levy is discriminating against US companies. As shown above, majority of the affected companies will be American.

What are the justifications by the Indian Government? 

1. India has said that levy does not discriminate against US companies as it applies equally to all non-resident e-commerce operators irrespective of their country of residence. 
2. The levy does not have extraterritorial application as it applies only on the income generated from India. 
3. Government is in its rights to tax digital transactions as the levy is recognition of the principle that in a digital world, a seller can engage in business transactions without any physical presence. 
4. In addition, Equalisation levy was one of the methods suggested by the 2015 OECD/G20 Report on Action 1 of BEPS Project which was aimed at tackling the taxation challenges arising out of digitization of the economy. 
5. Equalisation levy is a way to tax foreign digital companies and seen as a temporary alternative to the GAFA (Google, Apple, Facebook and Amazon) tax until such measure is well defined in India. 

Synopsis: With the conclusion of UK-EU trade agreement, now there is an opportunity to work towards UK-India Free Trade Agreement but resolving Cairn Energy issue must be a priority for that.  

Introduction  

Present developments provide an opportunity for both India and UK to move the bilateral economic plan forward.   

• Both countries have common interest in the issues, such as climate change and the green economy, economic recovery of both the countries from COVID-19. 
• After the conclusion of UK-EU trade agreement, UK can now focus on concluding trade agreements with key partners like India. 
• The Oxford/AstraZeneca vaccine which has been approved in the UK was developed in collaboration between the Pune-based Serum Institute of India and the Wockhardt factory in the UK. 

Importance of resolving Cairn Energy PLC issue 

The recent ruling of arbitration court in the favour of Cairn Energy PLC marks an end to the long-running dispute between Cairn Energy PLC and the Indian government over a retrospective $1.2 billion tax demand imposed in 2015.  

For India-UK trade to move forward and save the cost of arbitration, this issue need to end here.  

• Cairn Energy PLC was one such global investor whose belongings in India were held in an Indian company in which Indians sat on the board, which had Indian senior management, where many of the engineers were Indian.  
• The Cairn India got success from a significant calculated risk. The resources which Cairn Energy PLC bought from an international major had failed to find hydrocarbons on the land.  

• • • The purchase came with a major capital risk to drill several wells to totally explore the fields in Rajasthan.  
    • After the oil discovery, Cairn Energy PLC then developed these fields and installed new technology to extract the oil and transport it to refineries.  
    • During this entire period Cairn Energy PLC paid all taxes and dues on time and also invested in the local community, creating valuable infrastructure and jobs.  

Thus, there is no reason for dragging this matter any further. 

Why resolving cairns India issues will be beneficial for India? 

The Indian government has publicly stated in the past that the decision of the court would be honoured, so the decision of the court should end the matter.  

• Firstly, timely and logical settlement of this dispute would lead to an instant validation of the desirability of India as an investment destination and also to India’s status in the international and domestic debt and equity markets. 
• Secondly, a practical solution to the Vodafone and Cairn Energy judgments would improve India’s position at the top table of global economic powers. 
• Third, as stated above, it was one of the thorny issues in the India-UK relations and good relations with UK will open many opportunities for India in the EU region.

Source: The Indian Express

News: The current account surplus moderated to $15.5 billion (2.4% of GDP) in the quarter ended September of 2020-21 from $19.2 billion (3.8% of GDP) in the first quarter this fiscal.The current account saw a deficit of $7.6 billion(1.1%) in the year-ago quarter.

Facts:

• Why has current account surplus narrowed? The narrowing of the current account surplus in Q2 of FY21 was on account of a rise in the merchandise trade deficit to $14.8 billion from $10.8 billion in the preceding quarter.

Read Also : Current affairs for upsc

Current Account:

• What is the Current Account? Current account maintains a record of the country’s transactions with other nations, in terms of trade of goods and services, net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.
  • This account goes into a deficit when money sent outward exceeds that coming inward.
• What does Current account constitute? The current account constitutes net income, interest and dividends and transfers such as foreign aid, remittances, donations among others. It is measured as a percentage of GDP.

Current Account = Trade gap + Net current transfers + Net income.       abroad

• Why does Current account matter? Current account balance measures the external strength or weakness of an economy.
• A current account surplus implies the country is a net lender to the rest of the world, while a deficit indicates it is a net borrower.
• A country with rising Current Account Deficit(CAD) shows that it has become uncompetitive, and investors are not willing to invest there. They may withdraw their investments.

Synopsis: The Covid-19 pandemic once again proved the importance of creating resilient supply chains that can survive the tough times.  

Introduction 

Creating supply chains that can withstand the disruptions is extremely important. Disruptions through the times is something inevitable as it can be manmade or natural. For example, The Tahoka Earthquake of 2011, followed by the Tsunami, led to a nuclear disaster caused a sharp drop in Japanese automobile exports to the United States. 

State some examples of supply chain disruptions around the world 

To avoid global disruption in the supply chain system, the robust framework is required. Causes of Supply Chain Disruption can be natural or man-made.   

• Saudi Arabia’s oil refineries were attacked by terrorist drones resulting in a drop of 5.7 million barrels of oil per day. This caused a sudden fall in Saudi Arabia’s stock market and a rise in global oil prices. 
• China cut off exports of rare earth to Japan after the arrest of their fishing trawler captain in 2010 near the disputed Senkakuislands by the Japanese officials.  
• Coronavirus had an immediate effect on supply chains emanating from China.
• The United States government-imposed restrictions on the export of microchips to China’s biggest semiconductor manufacturer. The US felt that there was an unacceptable risk that equipment supplied to it could be used for military purposes. 

How vulnerable is India to this disruption? 

China has weaponised its trade and investment. Indias’ dependency on china for the following makes it vulnerable to supply chain disruption for many imp. Goods and services in the near future;  

• India’s pharma sector depends on China’s Active Pharmaceutical Ingredients (APIs). It creates vulnerabilities in the value chain. 
• India imports 27% of its requirement of automotive parts from China and after the pandemic it faced a huge difficulty given the sudden shortage of braking components, electrical components, interiors and lighting fixtures. 
• India has an import dependency of 80%even after becoming the 4^th largest market in Asia for medical devices. Among the biggest exporters to India in this field are China, the U.S., Germany, Singapore and Japan. 

What are the steps taken by India and other countries to ensure SCR? 

• The Supply Chain Resilience Initiative (SCRI) was started by India, japan and Australia which tends to focus on automobiles and parts, petroleum, steel, textiles, financial services and IT sectors.
• Japan aimed at diversification of investments to the Association of Southeast Asian Nations (ASEAN), India and Bangladesh.
  • • 89 Japanese companies availed subsidies to diversify out of China. Of these, 57 companies relocated to Japan, 30 to Southeast Asia and two to India.
• The Indian government is providing a big boost to defence manufacturing under the ‘Make in India’ programme. It has identified a negative import list of 101 items. 
• Australia has demonstrated strong political will in countering uninformed Chinese sanctions imposed on its key exports of grain, beef, wine, coal and much else.  
  • • Australia has demanded an inquiry into the origins of the coronavirus and advocated a strong Indo-Pacific vision. 

Way forward 

India has the capacity and the potential to become one of the world’s largest destinations for investments after the pandemic gets over. 

• There is a terrific opportunity for foreign companies to enter into tie-ups with reputed Indian defence manufacturers to tap into the growing defence market in India.
• ‘AtmanirbharBharat’ is aimed at strengthening India’s capacities to participate more robustly without being prey to supply chain disruptions. 

SCRI can get strengthened in the future after the involvement of France, though this might depend on the European Union’s position and the United Kingdom has also shown interest in the SCRI.

This article on WTO Rules on domestic support has been developed based on the Indian Express Editorial “The food security bargain”.

Context: Present  World Trade Organization WTO rules are not in to support food security and rural livelihoods in India and around the world.

With the initial results of National Family Health Survey (NFHS-5) between 2015 and 2019, it has become apparent that nutrition level in India is deteriorating. In these circumstances it has become a necessity for India to further strengthen its food delivery mechanism for the poor and vulnerable sections of the society.

Read more about NFHS survey – Implications of NFHS-5 survey results

But WTO rules and their discussion are creating hurdles in furthering food security programs in India and other developing nations. Farm subsidy notification

There is widespread consensus that the World Trade Organisation (WTO) rules should provide a necessary support for food security and rural livelihoods. 

Read – WTO Agreement on Agriculture

What are the issues in WTO’s rules?

WTO rules on domestic support to agriculture, at present looks tilted in favour of developed countries. In 2018, during global trade war escalation US claimed India’s market price support (MPS) was above the permitted 10 per cent limit as per ‘de minimis provision’. US Economist Franck Galtier also pointed out 3 biases in the WTO rules;

1. Firstly, using external reference price” (ERP) instead of present data. WTOs External Reference Price or ERP, for calculation of market price support (MPS) limit is set at 1986-88 level, even after global price hikes of 2007-08 and 2010-11.
2. Secondly, using procurement (administered) price, instead of domestic market price for calculation of support received by farmers.

3. Third, using total production instead of actual procurement. There is no clarity on whether to country’s food grain production or the amount that has been procured by government. While India uses just the amount of grains procured by the government, US using total production of rice and wheat to raise its objections.

Other than above biases, there are other concerns of India as well.

4. Fourth, US computes the MPS using the rupee as the currency while India calculates the value in dollar terms.
5. Fifth, Majority of the agri. Subsidies by developed countries have been listed in the green box, as non-distorting. For Ex, 88% of farm subsidies by US has been listed in green box, resulting into increase in its farm subsidies from around $61 billion in 1995 to $139 billion in 2015. 

Biswajit Dhar, professor at JNU, has rightly pointed out, “US has been subsidising its corporate agriculture to capture global markets while it targets the subsidies India gives to an overwhelmingly large share of small and marginal farmers.”  

If domestic market prices are compared with international market prices using the Producer Support Estimate methodology applied by the Organisation for Economic Cooperation and Development (OECD), India’s support, turns out to be negative for the years since 2000-01.

Thus, there is a need for updating the rules so that it becomes more relevant considering the present global realities and requirements by incorporating following suggestions;

1. Firstly, the reference period for price calculation should be updated to an average of 2014-16 or 2016-18 price levels.
2. Secondly, support consumed by subsistence farmers themselves, instead of selling in the market MSP, should be excluded from the calculations.
3. Third, India has recently pitched for a new criterions based on the “support per farmer”, instead of Aggregate Measurement of Support (AMS).
4. Fourth, a differential criterion should be developed for the countries having deteriorated social and health conditions so that they do not have to choose between the health of their people and export ban on them.

With the regime change in US, there are possibilities of increasing US involvement in WTO. Thus, to make it more meaningful, its rules should be updated so that it becomes more appealing and inclusive for the countries participating in it.

Context: WTO rulebook must evolve to support food security and rural livelihoods in developing countries.

What are the existing issues related to India?

• Whether the current farm subsidy rules provide enough room for developing countries to buy food at government-set minimum support prices as part of their public stockholding programmes.
• To negotiate a permanent solution.
• India’s farm subsidy notification this year to the WTO’s committee on agriculture brought the topic of procurement under public stockholding programmes.
• It indicated that India had breached its agreed ceiling on product-specific support to rice during marketing year 2018-19.
• For example, India’s wheat support was close to breaching product-specific support ceilings, with administered prices at $263.15/tonne.

What are the underlying issues with WTO?

• Delays: many countries pursuing improved market access and closer economic integration through bilateral and regional talks.
• Paralysed dispute settlement function: Donald Trump administration’s decision to veto new appointments to the WTO’s appellate body leaving many to question the future of the rules-based multilateral trading system.
• Method of calculation: Market price support levels are calculated by taking the gap between applied administered prices and an external reference price or ERP, set at 1986-88 levels, and multiplying this by the volume of eligible production.
• Divergent views on benchmark: WTO members could usefully consider whether the fixed ERP of 1986-88 is still a relevant benchmark, especially in the wake of the global price hikes of 2007-08 and 2010-11.
• Current scenario: food security disruption caused by US-China trade tensions and the inconclusive outcome of the WTO’s 2018 ministerial conference in Buenos Aires.

How does Indian subsidies doesn’t distort market?

• India’s support turns out to be negative for the years since 2000-01, if domestic market prices are compared with international market prices using the Producer Support Estimate methodology applied by the Organisation for Economic Cooperation and Development (OECD).
• Even after accounting for input subsidies, which represent a significant share of India’s non-product-specific support using the WTO system for calculating farm support.

Way forward:

• Updating the reference prices to average 2014-16 or 2016-18 levels or using a rolling average instead flattening out volatility by excluding the highest and lowest years from a five-year period.
• Exempt support from counting towards maximum limits when administered prices are set below international market price levels.
• Members could also discount support consumed by subsistence farmers themselves from the calculation of the volume of eligible production or exempting procurement that only equates to a small share of domestic output.
• WTO members need to agree on a shared framework for action on farm subsidy reform and set a clear direction and a timeframe for reaching a rational conclusion.
• Minimise disruption in food supply chain.
• The December meeting of the General Council that is mulling over WFP food aid issues offers India (with G-20) an opportunity to demonstrate its commitment to WFP food aid and help rebuild confidence in WTO’s ability.

An agreement under WTO could also lay the groundwork for long-overdue progress on the wider trade and food security agenda at the WTO.

The issue of anti-competitive practices by Tech giants has come into the light again as recently, an antitrust lawsuit was filed by the Federal Trade Commission (FTC) and governments of 48 US states against the tech giant Facebook, accusing it of crushing smaller competitors by abusing its dominant market position. Specific instances of acquisitions of WhatsApp and Instagram by it have been cited. 

In October 2020,  an antitrust lawsuit was filed against Google for misusing its dominant position as a search engine for favouring its own content in search results and entering into agreements with other companies like Apple, to make it the default search engine on devices. 

What are the anti-competitive activities of tech giants?

A report from top Democratic congressional lawmakers about the dominance of the four biggest tech giants-Amazon, Apple, Facebook, and Google- talks about antitrust activities by them.

Tech giants are involved in the wrong means (Like the acquisition or suppression of competition)  in order to make additional profits by gaining too much power over similar businesses resulting in an unequal playing field for other business entities.

For example, Facebook recently tried to take a competitive edge over Twitter by shutting down its API access for Twitter’s short video app, Vine, and restricting its ability to grow. Tech giants resort to antitrust activities like depriving access to their platform, discriminatory advertisement policies, breaching privacy, and unlawful acquisitions.

What are the impacts of anti-competitive activities by tech Giants?

Antitrust activities are in a way anti-competitive practices that have widespread negative impacts not only on competitors but also on the users:

• For users, antitrust activities may result in the availability of fewer options and weaker privacy controls. 
  • After gaining a dominant position in the market, WhatsApp and Facebook eroded privacy protection by changing the terms of service. It may result in the collection of all the private data and its hoarding that is becoming the biggest source of revenues and profits. Cambridge Analytica case is one such example in which Facebook data of Indian users was ‘stolen’ to allegedly influence the elections.
  • It also results in fewer choices left with the consumers for services. 
• Anti-competitive practices discourage innovation in the market as it incurs additional costs in surpassing the level of giants and competing with them. 
• It discourages ethical means by other tech firms as those who are sidelining it are having a competitive edge over them, in absence of proper regulations.
• A dominant position in the market may create a monopoly, leading to higher prices and low-quality services in the absence of a challenge from any other firm. 

Do Anti-competitive practices exist in India?

The antitrust lawsuits filed against Tech giants are very relevant for India as well, which is the base of 400 million users of WhatsApp and the largest single market for Facebook. Amazon has around one-third of the share of online retail in India. Most smartphones in India are Android-based, dominated by Google.

India as a country with a rising industrial base is not untouched by Anti-competitive practices which got amplified after the liberalization of the Indian economy in 1991. It resulted in the formation of the Competition Commission of India in 2003. Since its inception, till 31 March 2019, the CCI has noted 1008 instances of ‘antitrust’ matters. It has imposed penalties amounting to ₹13,381 crores Over the past 10 years.

Reports suggest that anti-competitive activities have resulted in unhealthy monopolies in the Indian economy. An analysis of 2035 listed companies across 298 industry groups shows that in 33% of all industry groups, there is one single company that controls over 50% of the net sales in the sector. For example; 

• Bajaj Auto dominates the scooters and three-wheeler industry. 
• Tata Motors has the most significant presence in light and heavy commercial vehicles. 
• Oil and Natural Gas Corp. is the country’s largest firm engaged in oil exploration.
• Facebook and Google together mop up 68%of India’s digital ad market revenues, while Amazon and Flipkart serviced 90% of all e-commerce orders during the 2019 festive season. 

Conclusion:

Thus, business activities plagued by anti-trust activities not only in developed countries like the U.S but also in developing countries like India. Ensuring fair balance, data regulation, and fair digital taxation are ways forwards for the regulating agencies to deal with these activities.

In India there is a need to give more power and capacity to the largely ineffective Competition Commission of India by enacting the Draft Competition (Amendment) Bill, 2020, to deal with such activities in Indian industries.

Context: The Rise of ‘corporate nationalism’ empowers Indian companies at expense of consumers.

Instances where the Sentiments of corporate nationalism has been raised against foreign corporates?

• Amazon-Reliance Dispute: The counsel for Future Retail accused Amazon of behaving like “the East India Company of the 21st century” and calling it “Big Brother in America.”
• Whatsapp pay still pending for approval before the Supreme Court: Even though Whatsapp has obtained all requisite approvals. Multiple oppositions claim that permitting foreign entities to launch payment apps would endanger the country’s financial data. This is despite the National Payments Corporation of India’s approval of WhatsApp’s data localisation practices.
• Severe restrictions on Chinese investments: By mandating prior approval for Chinese FDI, banning several Chinese apps and restricting Chinese bidders from participating in public procurement contracts.

Why shifting the focus to the foreignness of a company for regulatory assessment is problematic?

• Foreign investors hold majority stakes in most of these “Indian” startups which make complaints of losing market share to foreign companies. For example, while complaining Amazon as a foreign company, Reliance, too, doesn’t shy away from receiving investments from Google.
• It alters the legal jurisprudence by placing the foreign identity of a party at the centre of regulatory assessments, ultimately subverting the objective of commercial laws.
• It increases the risk associated with doing business in India by creating cause uncertainty in an already chaotic legal environment.

There is no doubt that the practices of many foreign companies are suspect. Not only foreign companies, many domestic conglomerates too have equally deep pockets and more political sway than their foreign counterparts, and a questionable track record of regulatory compliance.

Indians needs to be protected from its domestic corporate giants as much as any foreign company. This can be guaranteed only if regulators and courts consciously stay true to the statutorily mandated objectives of their respective regimes.

Source: Click here

What are the diversity requirements that Indian companies need to meet?

News: NASDAQ stock exchange in the US may soon require all companies listed to include at least one female board member as well as one member from a racial minority group or from the LGBTQ community on their board of directors.

Facts:

• Diversity requirements Indian companies need to meet? All public companies which are listed on stock exchanges and companies with either a paid-up capital of Rs 100 crore or annual turnover over Rs 300 crore are required to have at least one woman board member under the Companies Act.
• The Securities and Exchange Board of India(SEBI) further requires, from April 1, 2020, that the top 1000 listed companies by market capitalization have a woman board member who is also an independent director.
• Level of Compliance: According to the data compiled by Institutional Investor Advisory Services(IiAS), 17% of directors in the Nifty 500 companies were women as of the end of the last fiscal with the exception of several public sector enterprises(PSEs).

Source: Click here

News: United Nations Conference on Trade and Development(UNCTAD) has released a report titled “Impact of the COVID-19 Pandemic on Trade and Development: Transitioning to a New Normal”.

Facts:

• Aim: The report provides a comprehensive assessment of the impact of COVID-19 Pandemic on Trade and Development.

Key Takeaways.

• The global economy would contract 4.3% this year due to the pandemic. This could send an additional 130 million people into extreme poverty.
• The United Nations’ Sustainable Development Agenda 2030 will be derailed unless immediate policy actions are taken especially in favour of the poorest.
• Global poverty is also on the rise for the first time since the 1998 Asian financial crisis.In 1990, the global poverty rate was 35.9%.By 2018 it had been curtailed to 8.6% but has already inched up to 8.8% this year and will likely rise throughout 2021.

Recommendations:

• Increase the international assistance which would include offering debt relief to many poorer nations so they have the fiscal space needed to address the pandemic’s economic impacts on their populations.
• To reshape global production networks to be more green, inclusive, and sustainable while simultaneously resetting the multilateral system to support the most vulnerable and deliver on climate action.

Context: India needs to shed its exaggerated fears of trade agreements to create new jobs.

What are the challenges facing by Indian economy?